Minister criticises referral fees on personal injury claims

Jack Straw has criticised car insurance practices while Jonathan Djanogly has pledged to tackle personal injury litigation referral fees. Photograph: Jeff J Mitchell/Getty

Justice minister Jonathan Djanogly has criticised the payment of referral fees in personal injury litigation, but stopped short of saying the government will ban it.

In an interview on Radio 4's Today programme the minister said the referrals system gave people a "perverse incentive" to make unjustified claims. He said the government would be looking at several practices including referral fees, touting for business by text message, and garages selling lists of drivers involved in accidents, but added that these were the symptoms of a "rotten suing culture" rather than the cause.

Jack Straw has hit out at the practice of insurance companies selling the details of car accidents to personal injury lawyers, a business estimated to be worth £3bn a year and one which increases the price of every car insurance policy sold. The practice is also supported by the sale of legal expenses cover as an add-on to car insurance policies. Straw, who served as home, foreign, and justice secretary for a Labour government which lifted the ban on referrals, has described the practice as a "racket" which should be banned.

But Djanogly said banning referral fees would not help, and that those in the industry would simply find another way to make money.

He added that frivolous claims were encouraged by the fact that claimants need not spend a penny on litigation, even if they lose their case. The government intends to tackle this problem by transferring the cost of litigation to the claimant rather than the defendant, "so claims lawyers will be more concerned about taking on cases, and claimants will have an interest in what they are paying their lawyer".

The justice minister added that the government was considering recommendations from the Legal Services Board (LSB) on the regulation of referral fees. The LSB, an independent body overseeing the regulation of lawyers in England and Wales, has spent 18 months reviewing the regulation of referrals, and in May announced it had decided that the impact of referral fees and any abuses related to them should be managed by "strengthening transparency obligations, rather than seeking a simple ban on the arrangements".

LSB chief executive Chris Kenny said: "Our review found insufficient evidence of consumer detriment to justify a general ban, but we are clear that there needs to be a step-change in transparency and enforcement to improve competition and guard against abuse. We'll monitor the front-line regulators' performance on this.

"Of course, if firms are willing to pay substantial referral fees to get hold of cases to litigate, the government may wish to review the appropriate fee level for such litigation."

It defended the payment of referral fees in personal injury litigation, saying they allow consumers greater access to legal services.

But Russell Wallman, director of government relations for the Law Society, refutes this: "I think that argument is nonsense. There was a time 15-20 years ago when solicitors were unapproachable. That's no longer the case – almost all solicitors will offer no win, no fee arrangements, so people can go straight to a firm in their area knowing that they will not end up with a bill they can't afford."

Although the Law Society was responsible for lifting the ban on referral fees in 2004 when it was acting as a regulator, the professional body now believes a ban should be imposed on all forms of referral fees across all the regulated legal professions.

Law Society president Linda Lee said: "Referral fees hinder access to justice, contribute to rising costs in the justice system, and go against the interests of the consumer.

"We have always argued for a total ban on referral fees. Jack Straw believes they should be banned, Lord Justice Jackson in his recent report on costs believes they should be banned, and now even theinsurance industry agrees they should be banned. The government needs to wake up and take immediate action."