The government has announced a ban on referral fees, as ministers seek to put a stop to rising vehicle and household insurance premiums that are leaving consumers out of pocket. Ministers have accused insurance providers of covering the growing cost of personal injury and compensation claims by hiking up insurance premiums, a move which has left many motorists feeling the pinch.
The idea to tackle referral fees was suggested by Labour MP Jack Straw in June; the fees, which are paid to insurance companies, garages and claims handling companies for passing on details of incidents, usually road accidents, to personal injury lawyers, have been blamed for the increase in motor insurance premiums.
Insurance providers have passed the buck to consumers, increasing premiums to pay for personal injury claims. Consumers are being encouraged to save money by using car insurance comparison websites, but the price of premiums has increased significantly, without the customer gaining extra benefits in return.
Speaking on the issue, Justice Minister Jonathan Djanogly said "Honest motorists are seeing their premiums hiked up as insurance companies cover the increasing costs of more and more compensation claims."
He also described referral fees as a "symptom of the compensation culture" and added that people were being actively encouraged to sue, a move which was threatening the future of schools, businesses and individuals who were going about the way they live their daily life differently for fear of facing legal action.
Djanogly confirmed that the government would enforce a ban on referral fees and also suggested that they would take further action to "end the bizarre situation in which people have no stake in the legal costs their cases bring." He surmised that the actions would encourage people to think harder before claiming and this would subsequently urge insurance providers to pass on savings to consumers, by offering lower insurance premiums.
The Association of British Insurers said that a change in the compensation culture was necessary in order for the cost of premiums to come down. Director General Otto Thoresen explained the rise in premiums, saying "Rising claims costs from personal injury claims, excessive legal costs, insurance fraud and uninsured driving, coupled with lower investment returns in recent years, have unfortunately led to rising motor insurance bills for many customers."
Thoresen added that despite popular belief, the motor insurance industry was not making a profit out of higher premiums because revenue from policy payments was outweighed by claims payouts and expenses. Thoresen highlighted the example of Ireland, where efforts have been made to modify the compensation system and there has been a 16 per cent reduction in premiums.
News of the ban on referral fees has been welcomed by consumer group Which?, with chief executive, Richard Lloyd describing the announcement as "great news for motorists". Lloyd echoed the sentiments of Jonathan Djanogly, stating that the compensation culture had left many families strapped for cash, as they struggle to deal with the growing cost of insurance policies.
It is unclear when the referral fee ban will be introduced but Which? has urged the government to move quickly. The government proposals, which were brought in following a consultation by the Ministry of Justice in 2010, are designed to stop losing defendants paying a fee; instead, the plan is to make the claimant pay the success fee. The new system will reduce legal costs, which will enable companies to pass on savings to consumers by lowering the premium costs.
Insurance fees have been on the rise for a significant period of time and many consumers are struggling to afford their monthly premiums; the new government proposals will hopefully help to stall the growth of the compensation culture and this will result in fairer, more affordable premiums in the future.