Functional skills are the same level as GCSEs but have much less content so are not really equivalent. In the home ed community they seem to be done by those who would struggle to pass a full GCSE, or for costs reasons or because they can be done at home (for YP with illness/anxiety).
It is fair for colleges to ask for certain qualifications before accepting a student onto a course. Exam results are usually a good indicator of ability and whether the student is capable of managing the course.
In your son's case, while you consider him to be capable, his exam results don't reflect that so he has to start at level 1. The alternative would have been to take a year out, study again for the GCSEs required to get onto a level 2 or level 3 course and take them as a private candidate which can be costly. 1s and 2s at GCSEs are really poor grades so he either made no effort which was foolish and should have been discussed with him by you his parents, or he isn't as capable as you think.
Given where he is now, his best bet is to stick with the level 1 course and show he is capable even if he finds it easy or boring and then progress to level 2.
If you wanted to see how he would do if he sat GCSEs instead in order to progress straight to level 3 (A level equivalent), you could print off some past papers and see how he gets on.
My son missed most of year 8 and 9 and then studied for (i)gcses at home. He did the 5 he needed to get onto his chosen level 3 course. It can be helpful to look at what you son is aiming for and then work backwards to find out the best way to help him get there.
Technically, your son could study for and sit GCSES this academic year and next (maybe while doing a bit of work part time) and still start a level 3 course or apprenticeship if he choses that route at the same point as he would if he spends this year doing level 1 and next year doing level 2.
If you want to look at doing exams at home, google 'home ed exams wiki' where you will find lots of info.