There is such a lot of misinformation on this thread. Perhaps people making assertions as to the law could post links to back up what they say?
Firstly, as many others have said, (but lots have said otherwise) the aunt was not entitled to all her mother's money just because her brother was dead. Their mother died intestate and, assuming that she was domiciled in England or Wales, the assets would be split 50:50 between her children, with their children taking any share of a parent who had pre-deceased them.
Link for anyone who wants to look it up.
www.gov.uk/inherits-someone-dies-without-will
So the aunt inexplicably appropriated her nephew and niece's money, but appears to have given it back (or at least given it to FIL to be used for their benefit).
Secondly, as the children are minors, it would go into a statutory trust on death of their grandmother intestate as their father had predeceased them.
www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem3436
A trust does not mean that the children cannot benefit from the money until they are adults. It means that while they are minors, trustees can manage the money, buy and sell things on their behalf.
Statutory Trusts are governered by the Trustee Act 1925.
www.legislation.gov.uk/ukpga/Geo5/15-16/19/section/31
Link here to the specific part of the legislation that allows income of the trust to be used for the child's benefit. The following section allows advancement of the capital.
So FIL would definitely be able to apply to the trust (or, if he was a trustee, pay the trust money) for the benefit of the children. Which of course would mean to pay for food, clothes etc etc.
I have no idea why FIL would think he is entitled, morally or legally, to the money that belongs to their aunt.
The aunt would be well advised to make a will, otherwise her money will go to her father (if alive) or her nephew and niece, again on statutory trust, if not. Which may, or may not, be what she wants.