The UK's banking ombudsman could be forced to pay millions of pounds to a group of major lenders after the High Court quashed four of its decisions on overdrafts and credit cards issued earlier this year.

The Financial Ombudsman Service (FOS) has been left facing a bill that could exceed £2m in legal fees after the court sided with Barclays, NatWest, Santander and Vanquis Bank in a significant jurisdictional challenge.

The High Court ordered the FOS to cover the four lenders' legal costs following a judicial review in June, which overturned ombudsman rulings from July 2024 on complaints about unaffordable credit cards and overdrafts. The FOS, set up under the Financial Services and Markets Act 2000, provides a free complaint-resolution service for consumers who have exhausted firms' internal complaints processes, and is funded by levies and case fees on the financial services industry.

The court found in favour of the banks after determining that the ombudsman had made a "fundamental error of law" in attempting to expand its time-barring jurisdiction over historical lending relationships. The FOS had tried to bypass the standard six-year limit on complaints by arguing that every day a bank failed to remedy an unfair credit deal constituted a new event, effectively resetting the six-year clock. The ruling means consumers whose complaints about older lending fall outside the statutory time limits are unlikely to be able to pursue them through the ombudsman, as the complaints framework generally requires consumers to complain within six years of the event complained of, or within three years of becoming aware they had cause for complaint.

Following the June ruling, the banks sought compensation for their legal expenses. The FOS countered that forcing a public dispute-resolution body to pay full legal costs would create a "chilling effect" on its work.

'Chilling effect' warning fails to hold up in court

The court rejected that argument, ruling that enforcing costs against public authorities "will likely be conducive to good administration and be a salutary reminder about the inadvisability of taking bad or obviously flawed points."

The judge also criticised the FOS for generating "much unnecessary forensic heat and disputation" as a result of its shifting trial strategy.

According to the judgment, Barclays alone incurred roughly £830,000 in fees, while Vanquis and NatWest incurred approximately £353,000 and £158,000 respectively. Santander's costs have not been disclosed, but they are expected to push the total bill towards the £2m mark.

Under the court's order, Santander, NatWest and Vanquis are entitled to recover 100 per cent of their legal costs. Barclays, which led the lenders in the legal battle, was awarded 92 per cent after an eight per cent deduction was applied because its secondary human rights argument was rejected. The exact final figure will not be determined until a costs judge completes a line-by-line review of the banks' invoices.

The court ordered payment to be made within 14 days of the court's order.

The ruling comes amid a broader reckoning for the FOS, after the government launched a clampdown on the body earlier this year over concerns it had begun operating as a "quasi-regulator".

The government will legislate to introduce a 10-year time limit for bringing complaints to the FOS, while giving the Financial Conduct Authority (FCA) the ability to make exceptions to that limit. It also said it plans to return the FOS to its original role as an impartial dispute-resolution service that handles complaints "quickly and effectively". That legislative change, once in force, would extend the current complaint windows for consumers, though the timeline for implementation has not been set out.

The FOS has been approached for comment.