The Skills Funding Agency has threatened to ban some colleges and training providers from receiving public funding as allegations continue to be made that they are profiting from breaking the rules “by ignorance or design”.

In a statement on Monday, the agency said that efforts to improve the reliability of the success rate claims that are used to determine funding had failed to reduce allegations of sharp practice by providers. This failure was prompting it to take tougher action, it said.

“A small number of providers have tarnished this otherwise positive relationship, and have achieved financial gain at the expense of both learners and the public purse, whether through ignorance or design.

“In addition to the operational and financial consequences, such situations require a disproportionate amount of managerial resource to deal with them, and often have a wildly disproportionate impact on the reputation of both the agency and learning and training providers as a collective group.”

The reduced funding available to the agency as a result of the spending review was a factor in its decision to stop funding suspect providers if necessary.

Regulations require providers to be rejected for any criminal activity such as fraud, but they can also be excluded if they have had to repay pound;100,000 or more for mistaken claims, fail to repay money owed back to the SFA, have two instances of significant concerns in audit or fail to respond to notices to improve.

The decision rests with chief executive Geoff Russell, who can also bar providers if their directors have previously been involved with other organisations sanctioned for any of those reasons.

Providers have been accused of removing failing students from the records to boost their success rates using a number of techniques such as recruiting above target, then designating failing students as unfunded and therefore unrecorded at the end of the year. Others have allegedly manipulated course end dates to turn successful short courses into long courses that contribute to targets, and failed long courses into short courses, among other data fiddles.

Colleges and the funding body both agree that such issues are rare and not always the result of an intention to mislead.

But a Learning and Skills Council report last year found that 42 colleges changed the number of enrolments by more than 10 per cent between their first and last data reports to the funding body, although it did not attempt to assess whether there were legitimate reasons in all cases. Overall in FE, 6 per cent of students disappear from records between initial enrolment and the final data return.

At colleges - the funding body suspected of being the worst offenders - success rates rose by up to 40 per cent as a result of changes to the final data report. In a “control” college, not suspected of manipulation, there was no change.

David Willetts, as shadow innovation, universities and skills secretary, said Conservatives would address the incentive to exaggerate success rates by weakening the link between them and funding, which the coalition Government has said it intends to implement by reducing central targets.

But he also said the audit regime should be made tougher, which is less likely as the SFA sheds jobs and moves towards lighter regulation.