Compensation payments to people wrongly convicted of crimes are to be slashed by a total of £5 million a year, the Home Secretary Charles Clarke said today.
Individual awards will be capped at £500,000 - the same as the maximum amount paid to victims of crime - compared with the previous highest payout of £2.1 million.
Mr Clarke announced a highly significant ministerial review of the legal test currently used by the Court of Appeal to quash criminal convictions.
It will examine to what extent an error in the trial process necessarily leads to a miscarriage of justice, said a Home Office spokesman.
Mr Clarke described the move as an "urgent review" which could lead to a change in the law.
A discretionary compensation scheme set up by the former home secretary Douglas Hurd in 1985 will be scrapped immediately, Mr Clarke said. That scheme paid out £2 million a year.
A statutory scheme which currently pays out £6 million a year will remain in force but a number of new limitations will be placed on claimants.
Mr Clarke said he planned to bring in new laws so that compensation could be reduced to zero because of previous criminal convictions or other conduct by the applicant.
Scrapping the discretionary scheme means people who have been wrongly convicted will not be able to apply for compensation if their cases have been quashed while going through the normal appeal process.
Instead they will have to sue for compensation through the civil courts.
Mr Clarke said: "The changes I have announced today will create a fairer, simpler and speedier system for compensating miscarriages of justice.
"I am scrapping the discretionary scheme which has become increasingly anomalous and I do not believe that this can continue to be justified.
"These changes will save more than £5 million a year which we will plough back into improving criminal justice and support for victims of crime. "
On the review of the Court of Appeal test, Mr Clarke said: "I have embarked on an urgent review, with the Lord Chancellor and Attorney General, of the statutory test the Court of Appeal must use in deciding whether to quash a conviction.
"I propose to examine whether and if so to what extent an error in the trial process necessarily means a miscarriage of justice.
"I will consult upon the results of this review as soon as possible.
"If a change in the law is needed, we will propose it."
A review of this kind was previously recommended by Lord Justice Auld.
Average final awards for wrongful conviction have increased from about £170,000 in 2003-4 to more than £250,000 in 2005-6, according to Home Office figures. The highest award was £2.1 million.
In comparison the average award to a victim of crime is just £5,000.
Mr Clarke said he wanted the review to ensure the court process was based on what suspects did or did not commit, rather than the "technicalities" of the legal system.
The Home Secretary has repeatedly stated his dislike of the adversarial system which operates in British courts, and backed the continental-style inquisitorial system instead.
"I think the more the legal system clearly relates to the conduct of individuals who have done things or have not done things and the less it relates to the technicalities of the legal process the better it is for the transparency of the legal system as a whole," Mr Clarke said.
"What individuals want to see is a legal system which correctly finds guilty those who are guilty of an offence and acquits those who are innocent, with respect to what they did or didn't do rather than respect to whether the legal process was or was not correctly followed.
"I think getting a system which is more transparent than that is genuinely beneficial."
Lord Justice Auld proposed allowing the court of appeal to come back with a "not proven" verdict, similar to the option available under Scottish law.
Mr Clarke said: "What I think individuals want to see is a situation where the court at all levels could properly assess the likelihood of an individual who is charged with a crime."
Mr Clarke confirmed that one possible option could be to extend the not proven verdict to courts in England and Wales.
"We are going to have a look at it," he said.
"It would be a big change. It would be a radical change.
"The time has come to assess it."
But he stressed that no conclusions had yet been reached.
Sally Ireland, of human rights group Justice, said: "Like victims of crime, victims of miscarriages of justice can suffer terrible losses.
"This plan smacks of robbing Peter to pay Paul.
"To disqualify people who may have spent many months in custody from the scheme is a cynical attack on people who have already suffered enough at the hands of the state."Reuse content