Policyholders in Equitable Life who lost £4 billion when the mutual insurer collapsed could now face an uphill legal battle to recoup their savings.

More than one million policyholders lost up to 50 per cent of their savings when Europe’s oldest mutual insurer almost collapsed eight years ago. Many hope that a report from the Parliamentary Ombudsman, due to be published on July 14, will recommend that the Government pay compensation for their estimated £4 billion in losses.

Ann Abraham, the independent watchdog responsible for investigating complaints into more than 200 public bodies, is expected to find that the Treasury, Financial Services Authority and Government Actuary’s Department should have done more to prevent the crisis at Equitable.

However, lawyers gave warning that the report would not necessarily put an end to policyholders’ long fight to get their money back.

Although recommendations by the ombudsman are very rarely rejected, they are not legally binding. In 2006, the Government rejected recommendations by Ms Abraham that it compensate around125,000 people who lost more than £2 billion when they followed misleading Government advice to invest in occupational pension schemes that were not properly protected.

Last year, in a landmark case that lawyers said will have significant relevance to the Equitable affair, the Court of Appeal ruled that the Government had acted unlawfully and irrationally in refusing to accept the ombudsman’s findings and recommendations in that case. As a result, the Government is now paying the pensioners through the Financial Assistance Scheme.

However, the court also said that the Government had the right to reject the ombudsman’s recommendations provided it gives legitimate reasons for doing so — a decision that gives the Government some room for manoeuvre in dealing with Equitable while leaving the door open to a legal challenge.

If the Government did refuse to pay compensation, Equitable policyholders could seek a judicial review similar to that launched by the pensioners.

Lawyers said there was another avenue open for policyholders to sue the Government — although that, too, was limited.

Robert Morfee, a solicitor at Clarke Willmott, a Bristol law firm that has brought dozens of claims against Equitable Life, said that policyholders could sue the Government for failing to comply with European law.

Under regulations introduced in the early 1990s, the Government had a duty to monitor the financial health of insurance companies, including ensuring that they had sufficient reserves to cover their obligations. Last June, the European Parliament slammed the UK Government for failing to protect Equitable policyholders in accordance with the regulations.

Although a damning report by the ombudsman could add weight to such a claim, there would still be considerable obstacles. Policyholders would have to show that the directives were intended to confer rights directly to Equitable policyholders; that the Government grossly breached the directives; and that policyholders suffered losses as a result of that breach.

Mr Morfee said: “It is not a proposition to be dismissed lightly. The UK courts will enforce European law. But these are not easy cases.”

It was still too soon for any claims to be brought against the Government, he added. “We are interested but we’re not yet in a position at the moment to actually bring any.”

Mr Morfee said that claims against the Government had less chance of success than claims against Equitable itself. In December, Clarke Willmott reached an undisclosed settlement with Equitable on behalf of 406 policyholders and Mr Morfee is representing another 12 families in cases that have yet to settle or come to trial.

However, for most policyholders the legal time period for launching a claim against Equitable had now lapsed.

Clare Canning, a litigation partner at law firm Mayer Brown who successfully defended accountants Ernst & Young in a £2.6 billion negligence claim arising from the Equitable affair, said: “Policyholders may try to have a go at suing the Government but it’s not open and shut. The case would depend on the findings of the report but the threshold is high.”

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