A 40% agency margin is utterly unacceptable. Even at the worst margins I have faced it has never been more than 28% which is also outrageous. They should be taking no more than between 10 and 20% max depending on what they do for the money.

You should leave them. It's worth the hassle. They screw you once, it WILL happen again. I've been contracting for upwards of 16 years now and they never get better: all agencies try it on at some time or other.

Did you talk to the boss about taking you on?