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I think anon (16.41) has identified the real issue.
It's the setting of artificial high success fees. My firm has a policy of setting the success fee at zero so the client will retain all of his/her damages.
Using his example, if damages are £2,000 and costs are £1,000 there should still be no deduction with a nil success fee. If you're acting for a passenger in a rear end shunt you shouldn't, I imagine is the argument, be charging a success fee of 100%. If you do then that is always going to lead (in the example quoted) of the client losing £500 from his damages as the success fee is capped at 25%.
There are some firms which do not run any risk assessments and/or even if they do will still fix the success fee at 100% come what may. Therein lies the problem I think.