The unpopular system of financial "clawbacks" from colleges is to be abolished as part of the promised reform of further education's notoriously complex funding regime.
At present, the Learning and Skills Council insists on funds being returned by under-performing colleges, especially those whose student recruitment falls short of their predicted figures.
These retrospective penalties, often running to millions of pounds, have led to cuts in courses, redundancies or failure to implement pay increases in order to save money to pay off debts.
The new regime, to be introduced by the LSC from September 2004, includes several measures to reduce bureaucracy and increase the stability of college finances.
Future funding will still be based on business plans outlining what colleges aim to achieve and how much money they will need to do it, but there will be less scrutiny of how money is spent. Rather than being parcelled into funds for specific areas, money will come in a single lump.
Finance directors will no longer need to consult the LSC if they change priorities during the year.
New LSC guidance says that "future under-performance" will "inform the dialogue" about funding for subsequent years. Money will not have to be paid back but colleges that fall short will have their next business plan scrutinised more closely by the LSC - and it will be looking for a less ambitious range of programmes.
In the past, colleges have complained that a shortfall in student numbers does not necessarily mean spending less money, so the resulting clawback leads to cuts the following year.
Predicting student numbers is currently a gamble: if colleges overestimate, they risk clawback; if they underestimate, they risk losing out on funding which they could legitimately have claimed.
The LSC tried to alleviate the problem last year with what it calls "responsive growth" funding for courses in priority areas such as adult basic skills. It also introduced a tolerance threshhold which allows colleges to escape clawback if they achieve 97 per cent of the targets set out in their annual plans.
Responsive growth will go under the new regime but the LSC expects its local offices to fund significant surges in student numbers on high-priority courses.
The LSC will consult over the reform, but the new regime has already been welcomed by the Association of Colleges.
John Brennan, chief executive of the AoC, said: "In principle there is no question that it will lead to greater stability and simplification of the system. But we need to look at the detail and make sure these advantages are not eroded in some other way."
The new system means colleges will not have to analyse their individual learner records (ILRs) to confirm they given tuition for which they were funded, and met all the criteria for each student.
Ken Pascoe, national operations director at the LSC, said: "This process of over-funding and clawing back is a silly process and a very costly one.
"We are trying to have a sensible dialogue with colleges. It is about the relationship of trust that we have been talking about before.
"The ILR audit is a very detailed analysis. What we will want to know instead is simply whether the money is being spent properly as far as the rules of public expenditure are concerned."