Lax regulation and ‘systemic conflicts of interest’ have deprived motor accident victims of legal advice and encouraged them to accept reduced compensation from insurers, the Association of Personal Injury Lawyers (APIL) alleged this week.

APIL’s chief executive Denise Kitchener described as ‘institutionalised’ the practice of third-party capture, where the insurer of the ‘guilty’ party directly approaches the other. ‘Victims can often be persuaded to settle without consulting a solicitor, and accept many thousands of pounds less compensation than their entitlement.’

APIL submitted evidence of third-party capture to the Financial Services Authority (FSA) in November 2007. However, nine months later the authority said it was still considering what to do. ‘The FSA must stop dragging its heels and take firm control of the insurance industry, with its web of interdependency between a handful of major financial institutions,’ Kitchener said. ‘Transparent, rigorous regulation is urgently needed.’

Personal injury lawyer Paul Roberts, director of Liverpool firm Porters, agreed that the sector is open to conflicts of interest. ‘Fewer and fewer financial institutions own more and more car insurance brands. These brands are ostensibly competitors, yet profits are pooled and they often share the same panels of solicitors and barrister chambers to process claims. That’s a recipe for conflict, with consumers potentially denied independent advice and access to justice.’

Kerry Underwood, senior partner at Hertfordshire firm Underwoods Solicitors, said regulation had become less rigorous since the withdrawal of legal aid for personal injury cases, with banks and insurance companies forming ‘cosy relationships’ with law firms. ‘All sorts of scandals will be exposed by investigations arising from the financial meltdown – even if the government has woken up to the problem 10 years too late.’

However Henry Bermingham, president of the Forum of Insurance Lawyers, dismissed the need for action. ‘This is a highly regulated market, where the FSA regulates the insurers and the Solicitors Regulation Authority the lawyers. There’s scant room for manoeuvre.’

The FSA said it does not audit the relationship between insurers and lawyers. However, ‘we are taking the concerns expressed by APIL seriously’, a spokesman said.