The regulation of private providers has come under the spotlight after David Willetts, the universities and science minister, said he was "unable to intervene" in the case of a college that collapsed leaving hundreds of students facing losses totalling almost ?1 million.

Mr Willetts said the "commercial transaction" involved meant that he could not take action to help students of the London College of Traditional Acupuncture and Oriental Medicine - despite more than 200 of them studying for degrees validated by the University of Portsmouth.

The minister, who is keen to expand the role of private providers in higher education, made his comments in a letter (seen by Times Higher Education) to Conservative MP Mike Freer, who was enquiring about the collapse of the college, which was based in north London and closed in November last year.

Mr Willetts stated that the institution was "not in receipt of public funding" and outside his jurisdiction despite the Student Loans Company confirming that students on the college's undergraduate acupuncture course were eligible for state-subsidised support - 24 received fee loans in 2009-10.

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Some students at the college, many of whom paid an annual fee of about ?6,500 only days before the company announced it was closing, have been disappointed by the help offered by Portsmouth, which validated a BSc (Hons) in acupuncture and an MSc in Chinese medicine.

The university, which has no obligation to compensate the students financially, has been working to award credits to those who have completed work - and is helping them to find alternative places to finish their studies - including six with Portsmouth itself.

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Collectively the students at the defunct college are owed more than ?900,000, but under financial rules the directors will take preference in receiving any money that is left over. Students could receive nothing.

One BSc student, Sara Rajadel, said she faced losing ?6,200 and was struggling to save enough to complete the course elsewhere while also caring for a young baby. "There should be more rules that help students in this situation," she said.

Roger Brown, professor of higher education policy at Liverpool Hope University, said the case was a prime example of why a "tight regulatory regime" was needed to cover providers whatever their funding status.

"There does have to be a backup that protects students in these circumstances," he said.

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There are Quality Assurance Agency guidelines on collaborations between universities and other providers, but they are not legally binding. The current code of practice states that the awarding institution, Portsmouth in this case, should consider how financially stable a prospective partner is and "retains responsibility for ensuring that students...can complete (a course) in the event that a partner withdraws from an agreement". However, these points were only included in a new "amplified" code published late last year.

A spokeswoman for Portsmouth said the university was "very sorry" about the situation and was "continuing to explore" ways to help students complete their studies elsewhere.

She added that Portsmouth had carried out a "rigorous" approval process when it decided to validate programmes at the college in 2003 and at the time had concluded that the college was of good standing "professionally, academically and financially". All subsequent monitoring "continued to support this", she said.

simon.baker@tsleducation.com.