Radical changes in the way higher education is funded in further education colleges are to be considered by funding council chiefs.

Proposals contained in a report published this week call for funding of higher education courses in colleges to be channelled through regional clusters or "confederations" of institutions, including at least one university or higher education college.

And it suggests that higher education in FE colleges might eventually become the sole responsibility of the higher education funding councils, rather than being shared with the FE funding councils.

The report, Higher Education in Further Education Colleges: A Future Funding Approach, has been produced by the Higher Education Funding Council for England in the light of responses to its consultation paper Funding the Relationship, which mapped the extent of higher education in FE colleges.

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It says that while current cash constraints in further and higher education and the potential impact of the Government's review of higher education make it difficult to introduce changes quickly, there are strong arguments for a new funding approach in the medium to longer term.

Responses to the paper and discussions with the FE funding councils indicated support for a move away from current disparate funding arrangements to a more ordered one under which colleges had a clearly defined role in the delivery of higher education courses.

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This view was backed up by issues raised by the Government's higher education review, such as the growing importance of meeting employment needs, the possibility of a shift away from three-year to two-year degrees, and the need to relate the size and scope of higher education to the demands of lifelong learning.

"There may be growing pressure to change the nature and funding structure of the HE/FE interface as it becomes increasingly relevant to the future shape of higher education, complex in its diversity and in need of a more coordinated approach," the report says.

Better coordination could be achieved by funding confederations of higher education providers within a geographical area containing at least one higher education institution. This model could be introduced gradually, directing any future growth in numbers only to those universities and colleges which had developed this kind of arrangement.

The report also suggests that "the rationale for separate funding councils to fund what is rapidly becoming similar higher education provision in terms of level and nature is diminishing", and that the most logical next step would be for all HE in FE to be funded by the higher education council.

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The proposals are to be considered by a new joint HEFCE and FEFC policy review group, which met for the first time on Tuesday. Institutions have until April 29 to respond to the report.