The university funding regime could be abolished amid concerns that the sector is failing to meet the government's ambitious expansion targets.
The Higher Education Funding Council for England is to conduct a fundamental review of student demand later this year. The review team will "consider the long-term future" of the maximum aggregate student number funding system (MASN), under which universities are given public money according to controlled allocations of student numbers.
Radical funding systems could be introduced to push widening access initiatives and to fund universities according to their individual missions.
Hefce has confirmed that the review of demand and funding will take place as a result of the sector's concerns about achieving the government target to increase participation to 50 per cent of the population.
In a response to a letter from lecturers' union Natfhe, Hefce chief executive Sir Brian Fender said: "We do of course share your concerns that the sector should deliver the government's higher education participation targets.
"With this in mind, the Hefce board will consider later this year the longer-term future of the MASN as part of a review of student demand."
Natfhe hopes the review will lead to the abolition of the MASN. "The MASN is a rigid, bureaucratic and central device which distorts behaviour," said Tom Wilson, the union's head of universities. "It has outlived its usefulness."
The device was introduced in 1994 to control growth. Before 1994, institutions had a financial incentive to exceed their core-funded numbers and recruit fees-only students who brought in extra cash. The MASN gave each university a capped total, with the threat of financial penalties if it was exceeded by more than 2 per cent.
Last year, Hefce attempted to increase universities' flexibility to attract more students, amid signs of limited demand, by lifting the cap to 4 per cent. Several universities failed to recruit to target and the move was seen as a failure.
"We need a more sensitive funding regime, more capable of recognising universities' individual missions and prioritising different types of students," Mr Wilson said. For example, he said, institutions should be able to argue for higher incentives to recruit students from non-traditional backgrounds.
Dramatic changes to the funding regime are to be proposed by the Standing Conference of Principals. It has hired consultant Nigel Brown, who worked on Universities UK's report on the future funding of higher education, to take forward Scop's proposals for mission-based funding.
Scop hopes to produce a funding policy before the general election. Scop chief executive Patricia Ambrose said: "Our members are concerned that the current MASN approach restricts innovation."
A Hefce spokesman said: "We expect to consult the sector later in the year on likely future patterns of student demand, how we achieve the best balance between that demand and the supply of places, the implications for higher education institutions and any consequential adjustments that may be helpful in the way we allocate funding."
New education ministers are expected after the general election and Hefce is to have a new chief executive, Sir Howard Newby. Natfhe hopes the review will pave the way for a radical approach to university funding.
The council is considering student demand and supply generally, including the MASN mechanism, in the light of recent trends in student demand. The issue is being considered over the summer.