The Higher Education Funding Council for England should be transformed into a "consumer champion" with the ultimate sanction of being able to withdraw an institution's access to fee loan money, the government has proposed.
Plans for the overhaul of the sector's regulatory framework - set out in the government's White Paper - suggest that Hefce should have beefed-up powers, enabling it to maintain "quality, standards, diversity and choice" in the system.
It is also proposed that all providers - whether they are publicly funded institutions, further education colleges or for-profit companies - should come under such regulatory scrutiny if their students access loans.
The approach follows themes in Lord Browne of Madingley's review of higher education last year, which recommended that all institutions whose students accessed taxpayer-funded loans should be subject to the same regulation.
However, there are no plans by the government to create a "super quango" that also deals with student complaints and quality assurance.
Instead it is envisaged, subject to a consultation, that Hefce will have tougher powers to act if the Quality Assurance Agency or the Office of the Independent Adjudicator makes damning findings about a university.
David Willetts, the universities and science minister, said Hefce needed to shift from being a "grant-giving quango" to become more of a "classic regulator", whose powers were derived from determining which institutions could access student loan cash.
"Hefce's powers have essentially come from its ability to hand over the cash in grant. Increasingly, they will be more like the classical powers of a regulator that won't be linked in the same way to the receipt of grants," he said. "Hefce's powers will be linked, ultimately, to whether it will lend money to students to pay the fees to go to institutions.
"Some of the conditions currently attached to grant - in a modernised, light-touch way - will be attached to eligibility to student support.
"Think of a regulator protecting students as consumers, ensuring that they have access to what is still a very significant amount of public money and being clear about what happens in return."
He said that changing Hefce's name had been considered. However, his instinct was to avoid such a move as there was a danger that it "would distract attention from the real changes and the underlying function". "But it will become much more like a classic regulator, a consumer champion," he said.
The government has still to set out the nuts and bolts of regulatory overhaul and is expected to launch a consultation shortly, but the principle will be that any provider whose students take on fee loans will be subject to oversight from Hefce, the QAA and the OIA, as well as the Office for Fair Access if they charge fees over £6,000.
Currently, there are several private colleges with students who can access state loans - up to £6,000 in 2012-13 - although they are not subject to direct inspection from the QAA, are not investigated by the OIA and do not have to submit access agreements to Offa.
Once legislation is introduced, the government hopes to level this playing field. In return, students undertaking courses with alternative providers may be able to borrow increased loans of up to £9,000.
Offa's armoury: sanctions will allow flexibility short of the 'nuclear option'
Extra sanctions against universities that fail to meet agreements on fair access for poor students will be considered by the government as part of its regulatory reforms.
David Willetts, the universities and science minister, said that additional powers would be considered for the Office for Fair Access - ones that were more flexible than the "nuclear option" of stopping a university charging a higher tuition fee.
However, he stressed that "the legal framework in which universities determine their own admissions and are autonomous" would not be altered. Currently, Offa has only two sanctions: the power to impose a fine of up to £500,000 and the power to refuse to renew an access agreement, thus withdrawing a university's right to charge fees above £6,000.
The White Paper states that it will ask the new Director of Fair Access to advise the government on whether Offa's current powers are sufficient or whether "some clarification or extension is required".
It continues: "This could include, for example, the power to instruct an institution to spend a specific amount on access or retention from its additional fee income; a more flexible range of sanctions; or to make public an assessment of any institution that the director feels is not making sufficient progress against its access agreement."
The government also says that it plans to increase Offa's capacity fourfold to enable it to cope with its increased workload. "We will strengthen the Office for Fair Access, increasing capacity to up to around four times its original level, so that it can provide more active and energetic challenge and support to universities and colleges," the paper says.
The White Paper also states that the government plans to keep the post of Director of Fair Access independent from the Higher Education Funding Council for England.
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