Government ban on compensation referral fees

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The government is to ban referral fees on personal injury claims in a bid to curb a growing compensation culture, it has been announced.

Justice minister Jonathan Djangoly said the no-win, no-fee system meant "middle men make a tidy profit which the rest of us end up paying for through higher insurance premiums and higher prices".

Referral fees are used when a no-win, no-fee claim is passed between claims management firms, insurance companies and lawyers.

Under current legislation, referral fees can be obtained when claims are passed between companies or when a claim is made through a TV advert.

Speaking to Radio 4's Today programme, the justice minister said a government ban on the referral fees would help combat a "sick suing culture" which needed to be changed.

Djanogly said: "It's certainly a racket, it's a sick culture that we have to turn round.

"And I say culture because it's not just a question of insurance companies.

"It's small businesses being afraid of litigation and being put out of business by litigation; it's larger companies, who are often self-insured, having to put up their prices in shops and for their materials because of the amount they're having to pay out for claims; and then it goes even to more cultural things, like schools not wanting to send children on school trips because they're afraid of litigation."

The ban comes after an announcement from the Office of Fair Trading that the motor insurance industry could be investigated over soaring premiums.

The consumer watchdog said it was putting motor insurance under the spotlight after drivers faced average premium increases of up to 40 per cent in a year.

It issued a call for evidence as it looks to establish if any competition or consumer issues need to be addressed to improve the motor insurance market.

The Association of British Insurers (ABI) said the industry was committed to keeping costs down for consumers, however reform of the compensation system is necessary if insurance premiums were to come down.

Otto Thoresen, ABI director general, said: "We are very pleased that the government has listened to the insurance industry's campaign for a ban on referral fees.

"They add no value and encourage spurious and exaggerated personal injury claims. It is important that the ban must be watertight and apply across the board."

Desmond Hudson, Law Society chief executive, said: "The society has been calling for just such a ban for two years and it is pleased that the arguments it has made to ministers have finally been listened to.

"The society is, however, disappointed that the ban will not be extended more widely - for example into the area of conveyancing.

"The society believes this approach is short-sighted and does not recognise the clear potential for consumer detriment that exists in respect of one of the most important transactions most people make in their lives."

The government proposals follow a ministry of justice consultation published in November 2010.