The payment of referral fees in personal injury cases will be banned in a bid to tackle rising insurance costs, the Government said today.
Justice Minister Jonathan Djanogly said the no-win, no-fee system was "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".
The announcement came as the consumer watchdog said it was putting motor insurance under the spotlight after drivers faced average premium increases of up to 40% in a year.
The Office of Fair Trading (OFT) has issued a call for evidence as it looks to establish if any competition or consumer issues need to be addressed to improve the motor insurance market.
Referral fees are incurred when a no-win, no-fee claim is passed between claims management firms, insurance companies, and lawyers.
Hundreds of pounds can sometimes be paid out as lawyers can claim the cost of referral fees back from the defendant or their insurance company if they are successful.
Mr Djanogly said: "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."
He went on: "We will ban referral fees and we will go further.
"We have proposals before Parliament to end the bizarre situation in which people have no stake in the legal costs their cases bring. This will make claimants think harder about whether to sue and give insurance companies and business generally an incentive to pass the savings onto customers through lower prices."
The "shoparound average" for annual comprehensive car insurance cover rose by 40.1% for the 12 months to March 31, according to the AA's British insurance premium index.
But there is currently no timescale for when the ban will be implemented.
The OFT said the call for evidence represented a quick look into the market that may lead to a full inquiry if consumer or competition issues are found.
The role of price comparison sites will be examined by the OFT as it gathers evidence, and particular focus will be given to reports suggesting premiums are significantly higher in Northern Ireland than the rest of the UK.
It also has the power to refer the industry to the Financial Services Authority (FSA), but the OFT could look for voluntary action from insurance companies to assuage any concerns.
As well as looking at price comparison sites, the OFT said it identified a number of aspects of the motor insurance market that may raise competition or consumer issues.
The provision of credit hire replacement vehicles to drivers who are involved in accidents that are not their fault, insurance companies' use of panels of approved repairers, and additional products that are sold by insurance companies will all be considered.
The OFT will be gathering evidence from interested parties, while working with the Ministry of Justice and FSA, and will present its findings in December.
Otto Thoresen, director general of the Association of British Insurers, said: "We are very pleased that the Government has listened to the insurance industry's campaign for a ban on referral fees. They add no value and encourage spurious and exaggerated personal injury claims.
"It is important that the ban must be watertight and apply across the board. Banning referral fees is an important first 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."
Which? executive director, Richard Lloyd, said: "This is great news for motorists. Referral fees feed the growing compensation culture that has been pushing up insurance premiums at a time when many families are already feeling the pinch. It's absolutely right to ban them, and quickly."