Colleges have been told to seek advice before developing risky sixth-form links with schools.
Colleges doing cash deals with schools may be breaking the law, further education funding leaders have warned.
The Further Education Funding Council has told colleges considering links with a school to provide sixth-form education to ensure the school takes legal advice.
Legal guidance to the FEFC is understood to suggest using funding council cash for secondary education - including pupils in school sixth forms - is illegal.
The FEFC instruction is the firmest move to date restricting the scope for colleges to enter into franchising arrangements - deals under which the college pays for the operation, includes the students on its own rolls and is responsible for quality control, but may leave staffing up to schools themselves.
Leading principals believe the advice, issued in FEFC briefings to colleges on funding applications, shows growing FEFC unease over franchising.
The sector is still waiting for a report by the FEFC's franchising working party setting out guidelines. The document, due last Christmas, is now not expected until next month, indicating the complexity of laying down rules on the process.
One principal said: "I think the FEFC is trying to get away from the whole use of the word franchising altogether. What we are actually talking about these days is sub-contracting."
Confusion on what franchising arrangements allow is reflected in the interpretations of the new FEFC advice among principals contacted by The TES.
One said FEFC leaders were alarmed that adding a new college-run sixth form in fact constituted a change of status for a school - a development which would require notices to be published under education legislation.
The FEFC has warned partner schools and colleges their joint 16-18 initiatives should not be advertised as "new sixth forms" but should be termed "16-18 provision sponsored by" a particular college.
Paul Gallagher, principal of Bradford and Ilkley Community College and a member of the FEFC's quality assessment committee, interprets the FEFC move as an attempt to end double funding of school sixth forms with cash from both the school and its partner college.
The FEFC was also underlining its principle that colleges' main target group for expansion should be adults, not 16-18s, he said. "This is a warning shot across the bows for colleges."
The FEFC has taken legal advice and approved a new initiative from Manchester College of Arts and Technology to open sixth forms in three inner-city schools. But FEFC leaders set the scheme apart from a franchising deal because in each case the college and school will be working together on 16 to 18 provision, and have dubbed the arrangement "sponsorship".
Colleges are also understood to have been warned by the FEFC to beware franchises in work- places. They have been told the deals are perfectly legal, if they can produce detailed evidence showing the training they funded took place.
The procedure is straightforward with courses leading to particular qualifications, but with programmes where funding is given in return for a specific number of learning hours colleges find delivery harder to prove.
One principal said: "The FEFC is saying 'get involved at your peril unless you can prove it all to an auditor'." Colleges which cannot demonstrate teaching has taken place must pay back funding.
Colleges have already been given a warning by the FEFC of some of the tighter guidance to be issued over franchising. They will have to ensure their claims for funding units appropriately reflect the work done, and franchisees will be required to produce written confirmation that FEFC cash will not displace other public funds or existing expenditure by employers on training. The FEFC will demand evidence that colleges are able to manage franchised provision.