Government plans ban of referral fees paid by lawyers to claims management firms and insurers

The changes come as part of an ongoing review of the so called "compensation culture" where lawyers and claims referrers benefit from litigation by being paid referral fees, and the costs incurred by accident victims are increased, Justice Minister Jonathan Djanogly announced.

The current arrangements have led to "high costs, encouraged a compensation culture and led to the growth of an industry which pursues [accident victims] for profit", he said.

"People are being encouraged to sue, at no risk to themselves, leaving schools, business and individuals living in fear of being dragged to the courts for simply going about daily life," he added.

No indication has yet been given about when the ban will come into force, although the ban is likely to be introduced no later that October 2012.

The government is already planning to stop losing parties having to pay any 'success fee' element of an injured party's costs, or the cost of that injured party taking a legal expenses insurance policy to cover any of its costs.  

It is also making changes to legal aid, including cutting back the amount of civil legal aid available to victims.

The proposal follows a Ministry of Justice consultation last year after a far-reaching review into increasing civil litigation costs by a senior Court of Appeal judge.

At a speech to the Cambridge Law Faculty (11-page, 218KB PDF) on Monday, Lord Justice Jackson said that the existing civil costs regime had "substantially driven up costs and imposed a much heavier burden on the public purse".

In personal injury litigation in particular this has resulted in "far too much money swirling around in the system" and a "progressive escalation" of the referral fees which lawyers pay to get a share of business from claims management companies and insurers, he said.

In low value cases "more than half" of the costs are sometimes swallowed by referral fees, he claimed.

"In my view, such referral fees should be banned, as they were up until March 2004," he said.