Referral fees are to be banned in personal injury cases as part of the Government's efforts to tackle the UK's so-called 'compensation culture', the Ministry of Justice has announced.

The move, confirmed today (9 September), is part of the Government's efforts to drive down civil litigation costs in the UK.

It comes alongside the civil litigation reforms put forward earlier this year by Lord Justice Jackson, which were included in the recent Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO).

Under current legislation, referral fees can be obtained when claims are passed between entities such as claims management companies, insurance companies and lawyers, or when a claim is made through a TV advert.

Justice minister Jonathan Djanogly (pictured) has argued that referral fees force insurance companies to raise premiums and public authorities to pass the additional costs onto the taxpayer, because the winning party can currently recover their costs under 'no win, no fee' arrangements.

In response, the Government's LASPO bill proposes the abolition of the recoverability of success fees and associated costs in 'no win, no fee' arrangements, and will now also include the abolition of referral fees.

Djanogly said: "The 'no-win, no-fee' system is 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.

"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 news follows criticism from Jackson this week of the controversial Government cuts to legal aid included in the LASPO bill, which saw him warn that the reforms are "contrary to [my] recommendations".

The legal aid bill was unveiled by the Government in June this year in a bid to significantly reduce the £2.1bn annual legal aid budget by £350m, largely through a major withdrawal of civil legal aid.

Reaction to the ban

Law Society chief executive Desmond Hudson: "The society has been calling for just such a ban for two years and it is pleased that the arguments it has made to ministers have finally been listened to.

"The society is, however, disappointed that the ban will not be extended more widely – for example into the area of conveyancing. The Society believes this approach is short-sighted and does not recognise the clear potential for consumer detriment that exists in respect of one of the most important transactions most people make in their lives."

Bar council chairman Peter Lodder QC: "We are delighted that the Government has seen sense and is taking steps to ban all referral fees in personal injury cases. For a long time, and repeatedly, the Bar has called for referral fees to be outlawed, not just in personal injury cases, but in all cases, privately or publicly funded. They are bribes and add an unnecessary cost to litigation. They have no place in a fair and open justice system.

"We are also pleased to see the Government is acting on this issue in the public interest, which the Legal Services Board palpably failed to do when presented with the opportunity to earlier this year."

President of the London Solicitors Litigation Association, Seamus Smyth: "Like them or hate them, referral fees are a serious factor in the funding of litigation and litigation practices, and legislating them out of existence will present serious challenges to the draftsman.

"We wish him or her luck, and will be standing by to lend whatever assistance the LSLA can give in producing legislation which achieves the desired object without permitting or creating loopholes and satellite litigation, and more work – not for the first time – for litigators."