It says the current system in which personal injury details are sold on by insurance companies to lawyers has led to rising insurance costs.

Justice Minister Jonathan Djanogly said honest motorists were seeing their premiums hiked as insurers covered the costs of ever more compensation claims.

The Association of British Insurers said the ban must be “watertight”.

‘Whiplash’

Mr Djanogly said: “Many of the claims are spurious and only happen because the current system allows too many people to profit from minor accidents and incidents.

“Referral fees are one symptom of the compensation culture problem and too much money sloshing through the system.

“People are being encouraged to sue, at no risk to themselves.”

He said the ban, applied in England and Wales, would make claimants think harder about whether to sue, and give insurers an incentive to pass the savings on to customers.

Nick Starling, of the Association of British Insurers: ”Everyone has seen their premiums rise”

“It’s certainly a racket. It’s a sick culture that we have to turn round.”

There is no current timescale for implementing a ban.

The government is already planning to stop losing defendants having to pay a “success fee” to reimburse the claimant’s lawyer for unconnected cases he may have lost.

It says the proposals before Parliamentmean people making the claim will have to pay the success fee – which will be capped – rather than the defendant.

Legal costs overall will fall which means lower costs to pass on to customers, it adds.

The news had a negative impact on shares of leading car insurer Admiral on Friday, cutting 5% off their value early in the day.

Admiral does not sell customer data, although if one of its policyholders suffers an injury in an accident which was not their fault it will put them in touch with legal help.

It said referral fees accounted for around 6% of its UK car insurance profits.

The Association of British Insurers – which speaks on behalf of leading insurers – said it welcomed the announcement.

Underground fears

Director General Otto Thoresen said: “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.

“It is important that the ban must be watertight and apply across the board.

“Banning referral fees is an important first step in tackling our dysfunctional compensation system, and needs to be accompanied by a reduction in legal costs and action to tackle whiplash if honest customers are to benefit from these reforms.”

Chairman of the Bar, Peter Lodder QC, said referral fees had “no place in a fair and open justice system”.

“They are bribes and add an unnecessary cost to litigation.”

The Association of Personal Injury Lawyers vice-president Karl Tonks said there was a concern that a blanket ban could push the transactions underground.

“The really important thing is for there to be transparency, so that the injured person, the consumer knows what’s happening and their details are only passed on to anybody with their express consent.”

He said his members would welcome a ban on accident victims being approached to make claims by cold-callers.

“Solicitors are robustly regulated in this, we simply cannot and do not do it. Others are not so well regulated.”

However, the Claims Standards Council, which represents claim management businesses, said the proposals will have “no impact whatsoever on the issues that concern the public like data protection and cold calling, unsolicited text messages or insurance fraud”.

Chairman Darren Werth said: “Those involved in helping claimants access justice do not like these abuses any more than the industry’s worst critics.”

With Access for Justice Action Group, it proposed making insurers justify their fees to a regulator, prohibiting approaches to a claimant without permission, and banning financial inducements in adverts just for making a claim.

Universal definition ‘lacking’

Shadow justice minister Andy Slaughter said Labour supported the ban, particularly when applied to road accidents, but had some reservations.

“It is strange that the Ministry of Justice is seeking to ban all referral fees when the government themselves admit that there is no universal definition of what constitutes a referral fee.”

Mr Djanogly said finding a definition was “challenge” for him, but he was hoping to get it included in the legal aid bill, possibly by Easter next year.

Meanwhile, the Office of Fair Trading said it was putting motor insurance under the spotlight after drivers had seen premiums rise by 40% on average in a year.

In 2009, the number of road accidents involving personal injury was 31% down on the average for 1994-98.

But the cost of personal injury claims has doubled from £7bn to £14bn in the past decade and motor insurance premiums have risen at least 30% in the last year.