The government has today announced that it will ban the payment of referral fees in personal injury cases.

The Ministry of Justice said the current arrangements have led to high costs, encouraged a ‘compensation culture’ and led to the growth of an industry which pursues claimants for profit.

The ban will not cover conveyancing cases and will be enforced as a regulatory rather than criminal offence. A spokesman for the MoJ said there are no precise dates for when the ban will be implemented, with discussions still taking place on the details.

Supporters of a ban argue that insurance companies pass on the costs they incur through increased compensation claims on to the motorist and those with other insurance policies, forcing up the cost of living.

Justice minister Jonathan Djanogly said: ‘The no-win no-fee system is pushing us into a compensation culture in which middle men make a tidy profit which the rest of us end up paying for through higher insurance premiums and higher prices.

‘Honest motorists are seeing their premiums hiked up as insurance companies cover the increasing costs of more and more compensation claims. Many of the claims are spurious and only happen because the current system allows too many people to profit from minor accidents and incidents.

‘Referral fees are one symptom of the compensation culture problem and too much money sloshing through the system. 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.’

The ban on referral fees is the latest in a series of government steps to reform civil litigation costs, although it was not included in the first package of changes based on last year’s review by Lord Justice Jackson.

Speaking earlier this week at a lecture in Cambridge, Jackson repeated his call for a ban on referral fees, citing the ‘middle men’ such as claims management companies, BTE insurers and trade unions as the beneficiaries of the system, rather than claimants.

The insurance lobby has welcomed the announcement but warned the government that further challenges await.

Otto Thoresen, director general of the Association of British Insurers, said: 'It is important that the ban must be watertight and apply across the board.

'Banning referral fees is an important step in tackling our dysfunctional compensation system, and needs to be accompanied by a reduction in legal costs and action to tackle whiplash if honest customers are to benefit from these reforms.’

The ban will not cover conveyancing cases and will be enforced as a regulatory rather than criminal offence. A spokesman for the MoJ said there are no precise dates for when the ban will be implemented, with discussions still taking place on the details.

Paul Evans, chief executive of insurance firm AXA, which called for a ban on the practice earlier this year, agreed that referral fees were the 'tip of the iceberg’, urging the government to commission 'a robust review of the fixed fees charged by personal injury lawyers for minor injury claims’.

Ross Clark, underwriting director at ATE insurance specialist FirstAssist Legal Expenses, expressed the view that today’s ban may not see an end to selling of injury victims’ details.

He said: 'Before referral fees were legalised in 2004, I know that enterprising lawyers found ways of transferring the economic benefit of injury actions a long way before that time.

'So it isn’t too cynical to believe that whatever is done to ban referral fees will simply cause this to happen in a different (and arguably less transparent) way.’

There was a positive reaction to the announcement from the Bar Council, as well as criticism of the Legal Services Board for failing to push ahead with a ban in May.

Peter Lodder QC, chairman of the Bar, said: 'They [referral fees] are bribes and add an unnecessary cost to litigation. They have no place in a fair and open justice system.

'We are pleased to see the government is acting on this issue in the public interest, which the Legal Services Board palpably failed to do when presented with the opportunity to earlier this year.’

But the outright ban was labelled a 'kneejerk' reaction from the government by Deborah Evans, chief executive of the Association of Personal Injury Lawyers.

She said: 'Most solicitors have reservations about referral fees but it's difficult to see how they can be banned without simply being driven underground, where we know from past experience that chaos and lack of transparency for consumers will be the inevitable outcome.

'Instead of trying to ban referral fees, why not introduce real solutions to tackle the real problems in the system? Why not impose an outright ban on the passing on of injured people’s private details without their express consent, on every occasion.'

The Law Society is also pressing the government to include conveyancing cases as part of the ban on referral fees.

Chief executive Desmond Hudson said the society is 'disappointed' that the ban will not be extended more widely and a letter has been sent to the Department of Business, Innovation and Skills asking them to reconsider on 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.

'Consider this, I appoint an estate agent to sell my house, I pay his fee, without my knowledge he sells my case to a conveyancer. How is that in the interests of the consumer?'