CITY lawyers last night gave warning that it will be “almost impossible” to challenge any decision from the Financial Ombudsman following a key ruling in the High Court.

Freshfields Bruckhaus Deringer, one of the “magic circle” of top City law firms yesterday also accused the Financial Ombudsman Service (FOS) of having “no effective checks or balances”.

The comments came after a ruling in the High Court involving IFG Financial Services, a financial adviser, and its case against the FOS, the arbitrator for disagreements between financial companies and their customers.

Lawyers are now fearful that the ruling has set a precedent which could cost other companies tens of millions of pounds in compensation payments.

David Scott, a partner at Freshfields Bruckhaus Deringer, said: “This is a big issue — the Ombudsman is a very powerful organisation with no effective checks or balances.

“Our clients are realising more and more that the broad scope of the Ombudsman’s power is a real issue,” he added.

The Association of British Insurers, whose members are subject to the FOS’s decisions, said: “This is something that we need to consider carefully, to work out all of the ramifications.”

Mr Justice Stanley Burnton found late last month that the FOS was free to order companies to pay damages, even if that company would not be required to pay compensation under English law.

Two clients of IFG reported the adviser to the FOS after it wrongly invested their money in a high-risk investment fund.

The clients subsequently suffered a significant loss, not due to the nature of the investment but because of fraud by one of the fund’s investment managers. IFG obtained legal advice that, under English law, it should not have to pay compensation in the circumstances. Although the Ombudsman did not disagree with the legal opinion, it decided in favour of IFG’s clients.

The financial adviser sought a judicial review, arguing in the High Court that the FOS had failed to take account of the relevant law. But the court found that, as long as the Ombudsman’s decision was “fair and reasonable”, it did not have to follow the law.

Mr Scott said that this was the most recent of several legal decisions that had showed “the courts had very little appetite to exercise their power of review over the Ombudsman”.

“It’s again confirmed that firms applying for judicial review will generally face significant hurdles and are rarely likely to succeed, even when the law is on their side,” he said.

“It seems that the Ombudsman can ignore the legal position if he doesn’t like the result it would lead to.”

Mr Scott said that, instead of considering cases individually, as it was originally designed to do, the FOS often used the same decision to apply to a swath of identical complaints about a company. The inability to obtain a successful judicial review meant that the FOS’s £100,000 limit on individual fines could be multiplied thousands of times in large cases, he said.

Walter Merricks, the chief ombudsman, has headed the FOS since 1999.

The FOS said: “We found it reassuring that the court recognised that fair and reasonable might be different to how the courts in the past might have made their decision.

“We wouldn’t have thought that the case had any wider implications for other companies”.

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