The new Learning and Skills Council will phase in an "interventionist" system of funding and local strategic planning when it takes the reins of post-16 education and training from April.
The news came as education secretary David Blunkett confirmed the LSC budget as £5.6 billion in 2001-03.
LSC chief John Harwood has told college heads that further education colleges, which account for at least 75 per cent of provision, would be expected to sacrifice some of their independence to work collaboratively with local partners towards goals set by local LSCs and ministers.
They will take decisions with schools, private education and training providers, and higher education institutions instead of as freely as they have since incorporation seven years ago.
The plan emerged last week from the Further Education Funding Council's final annual meeting in Birmingham. It was welcomed by the Association of Colleges, which represents college leaders.
John Brennan, the AoC's director of FE development, said the LSC's plans were "fine" as long as they included close consultation with colleges and equitable funding and inspection regimes.
But David Melville, the FEFC's departing chief executive, warned that the LSC was taking a risk.
"There is no doubt that some colleges have said they want more local planning and more context for what they are doing. However, it carries risks. Colleges may find it difficult to adjust," he said.
Mr Harwood told the conference that the LSC's aimed to increase participation, improve attainment and "tackle some of the deep-seated prejudices in our society about the place of learning" that could be achieved only through greater collaboration.
He said: "The first big change is the comprehensive nature of the new structure. It's not just a funding system, it's a funding and planning and interventionist system. I mean that in a collaborative and supportive way. It recognises that levers to change performance, achievement and supply are much wider than funding."
In response to a question on flexibility, he added: "You might find you have more flexibility at a local level, but you have to share decisions about that flexibility because one of the changes will be that colleges and other providers will not be operating as completely free-market operators."
He later said he did not think most colleges were "precious about their independence", adding: "We want entrepreneurs, but it's entrepreneurs for the common interest, not for the interest of one particular institution."
Professor Melville said area-wide inspections being led by Ofsted could lead to rationalisation in FE and "redistribution of provision" from colleges to other providers.
The best advice he could give the LSC was to make its new system transparent "so as to minimise the number of things that can go wrong". The FEFC had achieved much, but its funding methodology had proved so complex it had been difficult to change, he said.