The education department has been criticised for its mishandling of the flagship Individual Learning Accounts policy.

The lifelong learning scheme, set up three years ago by Labour, collapsed after millions in pounds was lost to fraud.

The parliamentary ombudsman has said the Department for Education and Skills was "guilty of serious maladministration" and ordered compensation for a student and learning provider caught up in the crisis.

In a new report Ann Abrahams concluded that service provider Capita Business Services failed to work effectively with the department to ensure the security of the scheme.

She also found that the department failed to deal with a backlog of applications for accounts following the scheme's suspension.

And she pursued a complaint from an applicant whose personal account was raided by fraudsters.

While she rejected calls for a national compensation scheme for those affected, Abrahams recommended that the department reimburse students in particular cases.

The watchdog also examined the case of a training provider hit by the collapse of the scheme.

Training firms claimed they faced hardship as a result of the withdrawal of student funding - with many students beginning courses which they could not complete once the funding was withdrawn.

Following the watchdog's investigation the DfES offered £500 in compensation to one provider embroiled in the collapse of ILAs.

It also pledged to examine whether to extend compensation to other students and providers.

"The Department for Education and Skills is very sorry for the difficulties that some learning providers and learners experienced with the Individual Learning Account programme during 2001," said a Whitehall spokesman.

"The Department fully accepts today's report by the Parliamentary Ombudsman and has already apologised and made arrangements for suitable reimbursement to the learner and learning provider highlighted in the report.

"The Department is also currently seeking out learners and learning providers that have had similar experiences to apologise and arrange similar redress.

"Overall, the delivery of Individual Learning Accounts fell a long way short of the standards that the public has a right to expect.

"It was unacceptable and the department is in no doubt that serious mistakes were made and hard lessons are being learned."

The department revealed that 200 learning providers say they were affected by the system's collapse and may now be eligible for compensation.

Four hundred students also received compensation for "out-of-pocket expenses".