The government is ‘sympathetic’ to the idea of banning referral fees, Ministry of Justice minister Lord McNally told the House of Lords yesterday.

McNally said that if public opinion demands a ban, the government will respond to that demand.

In response to a question by Lord Sheikh, chairman of insurance broker and financial services firm Macmillan Sheikh, McNally said: ‘The government are sympathetic to the idea of a ban on referral fees and are looking at how to tackle the issue as part of our wider reforms, and at how we could do so in a way that would be effective.’

He added: ‘We are not a knee-jerk reaction government; we are looking at the problem. The prime minister himself has made it very clear that we believe that Lord Justice Jackson has given us the solution to the problem [by recommending a ban]. We are now looking at how to make it most effective.’

However, the Liberal Democrat peer indicated that provisions on referral fees will not necessarily be introduced into the Legal Aid, Sentencing and Punishment of Offenders Bill currently in the Commons.

McNally said: ‘Whether the question of referral fees will find its way into the bill is a matter for the study that we are undertaking into ways that this could be implemented. However, we are trying to bring forward a range of the Jackson proposals in that bill.

‘As to referral fees, as my noble friend will be aware, the Legal Services Board and the Transport Select Committee advised a solution in terms of transparency. Lord Justice Jackson recommended a ban and, as I indicated, the government are sympathetic to the idea of a ban.’

Labour peer Lord McFall of Alcluith asked McNally: ‘The industry has called this its "dirty little secret". Given that over the past 10 years personal injury claim payouts have doubled from £7 billion to £14 billion while road accidents have largely reduced over that period, is this not a clear case of market failure, and the government should report this to the Office of Fair Trading to look at this issue and get this industry sorted out?’

McNally replied: ‘Whether it is a matter for the OFT or the regulator is a balance of judgement. [Lord McFall] is right that the figures are showing a doubling.

‘One of the factors that one must look at is the unbelievable increase in whiplash claims, about which I know the Association of British Insurers has held talks with my colleague [justice minister] Jonathan Djanogly.

‘It is far too easy to find in even the most minor of accidents that subsequently whiplash is claimed, along with quite substantial damages. One of the weaknesses in the system is that the insurance companies find it easier to settle and pass on the costs to the customer than to fight these bogus claims in the courts.’

Liberal Democrat peer Lord Marks of Henley-on-Thames added: ‘Does [McNally] agree that this practice of insurers charging solicitors referral fees for names is not only unethical and offensive but ensures that the claims are handled not by the most competent or well-qualified solicitors but by those who are prepared to pay the most to buy the clients – thus effectively depriving their clients of their right to choose the best lawyers to handle their cases?

‘Is that not another good reason for implementing Lord Justice Jackson's recommendation for a ban on such fees?’

The minister said he agreed with the point, adding: ‘I hope that the more the public are aware of what [Lord McFall] described as this "dirty little secret", the more it is in the public domain and the more that all parts of the insurance industry, including the insurance companies, solicitors and the consumers, will demand – and we will respond to that demand – to ban it.’