The best interests of post-16 students in Wales are often overlooked as colleges and schools compete for students and funding, according to inspectorate Estyn's annual report.
Chief inspector Ann Keane said that attitudes to preparing students for life and work at different providers varied to an "unacceptable degree". The problem was an "unfortunate consequence" of a competitive funding regime, she said.
The Welsh government is carrying out a "root and branch" review of post-16 funding after scrapping the previous process, the National Planning and Funding System (NPFS), which was criticised for being too complex and encouraging competition.
Ministers want a revised system in place for the 2014-15 academic year, but acknowledge it will need an "important shift in culture" from all involved to be successful. Funding for FE colleges and school sixth forms dropped in 2011-12 after the NPFS was scrapped, although budgets are set to rise this year.
Meanwhile, Ms Keane said, students were suffering from continued competition between providers, despite government efforts to encourage greater collaboration.
"Some providers, including schools and colleges, misguidedly retain learners in unsuitable provision or try to duplicate provision in schools that is better delivered in further education colleges or work-based learning providers," she said.
ColegauCymru, the body that represents FE colleges in Wales, said that competition was determined by the educational structures and funding system.
A spokeswoman said: "Competition can help drive up standards, although it can also serve as a diversion of scarce public funds. Over recent years, a number of further education colleges have sought to merge to deliver more efficient, joined-up learning while also improving their high quality provision."
By the end of this year, the number of FE colleges in Wales is likely to total just 15, compared with 25 four years ago.
A number of schools and colleges have developed strong collaborations as a result of the 2009 Learning and Skills Measure, but Ms Keane said that partnerships were better at key stage 4 than at post-16.
ColegauCymru said the funding structures motivated providers to enter learners for a number of qualifications.
"However, the government is currently working on the development of a new post-16 funding system that we anticipate will allow providers to ensure all learners are put on the most suitable programme of learning," the spokeswoman added.
Ms Keane also lamented the lack of a comprehensive national system to compare post-16 attainment and progression data across sixth forms and FE colleges, something ColegauCymru has also called for and the government has previously made a commitment to.
"This means that we cannot compare the success rates of post-16 courses ... and that learners and parents cannot make fully informed choices about what and where best to study," she added.