The Ministry of Justice has said the ban on such fees, to apply solely to personal injury cases, is designed to tackle the alarming rise in car insurance premiums and “curb compensation culture”.
It will apply to adverts and text messages sent by unscrupulous legal firms or claims management companies to encourage people to make a no-win-no-fee claim.
“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,” said justice minister Jonathan Djanogly.
The decision comes just days after the Association of British Insurers launched a campaign backed by Ford and Asda to reform the system which is responsible for up to 40 per cent increases in car insurance premiums in the past year.
The ABI welcomed the MoJ’s decision.
“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,” said ABI director-general Otto Thoresen.
The ban is likely to most affect Admiral, the UK motor-focused insurer that makes most from referral fees in its sector.
It issued a statement welcoming the proposed change and saying it should cut about six per cent from its UK motor profitability, equal to about £16m of its 2010 pre tax profit.
However, its shares have fallen 4.4 per cent on the news.