This week Nick Starling of the Association of British Insurers (ABI) finally acknowledged that insurance companies pass on information about injured clients in return for referral fees.

Former justice secretary Jack Straw went further by calling the industry 'a complete racket', and brought to public attention the existence of referral fees in the entire motor accident sector - from vehicle recovery agents, bodyshops and garages, insurance companies, even the police.

Phrases commonly used in articles about personal injuries suffered in road traffic accidents include: no-win-no-fee, claims management companies, ambulance chasers, referral fees, increasing insurance premiums, unsolicited calls and texts.

Insurance premiums have 'soared' in the past 24 months, and the finger is being pointed at claimant solicitors and claimants themselves due to the cost of legal fees.

Justice Secretary Kenneth Clarke has proposed a number of measures that could affect how injured road users recover damages, and is now being urged by Mr Straw to fully investigate an end to referral fees.

At the same time there's a growing perception that insurance premiums are increasing due to unscrupulous activity by 'no-win-no-fee' law firms; a perception that insurers are happy to encourage.

All firms of solicitors dealing with personal injury work can be a 'no-win-no-fee' firm. The term itself has negative connotations. If an injured individual walked into the office of any firm, it's likely they'd have to have funding put in place in order to pursue their claim.

The conflict for the private individual is actually one of whether or not they need to have any legal cover with their motor insurance policy (please see our article for more information).

Those who choose to do so have what's known as 'before the event' cover. Those who don't purchase legal cover when they take out a policy must then fund any subsequent claim with an 'after the event' insurance policy - a conditional fee agreement, aka a 'no-win-no-fee' arrangement.

Both provide very similar levels of cover, albeit the premium for an after the event policy is likely to be higher. The negative perception of 'no-win-no-fee' questions a fundamental right in English law - that of freedom of choice for legal representation.

The issue of referral fees can be linked to these funding options. Insurers claim to be calling for an end to referral fees; but are they really?

Those choosing to purchase legal cover before the event become 'tied' to the insurer in the event of an accident. The majority of insurers and brokers will have a panel of solicitors to which before the event funding holders are passed to. Panel solicitors will have a pre-existing agreement in place to pay an introduction fee to the introducing insurer - a referral fee. Said fees can currently exceed £850 per introduction. So it's seen as a legitimate revenue source for many insurers.

With such riches available, the rise of the claims management company is of little surprise. If there's an introduction fee to be had, they'll want it. Their aim is twofold: a) they may seek to get to any potential claimant before their insurer has been notified; b) seek out those claimants who don't have before the event legal expense funding.

It's through this activity that the role of the claims management company is often confused with that of the firm of solicitors that eventually acts for claimants. Unsolicited texts, emails or calls, and TV advertising are all ways for claims management companies to attract potential claimants. Is this the ambulance chasing element? It's certainly the reason why Mr Straw has come out this week in objection to referral fees after a friend received such an unsolicited text or call.

Governed by the Ministry of Justice, there are no strict rules in place to prevent any of this activity. With such rich pickings available, some have certainly gone to the lengths of encouraging exaggerated injuries and even fraudulent claims, in which a claimant presents a claim when they may never have been in the vehicle that was involved in the accident in question.

Solicitors are regulated by the Solicitors Regulation Authority (SRA). There are very clear rules in place governing how solicitors advertise, and any form of unsolicited cold calling is prohibited. Not only is it prohibited for the solicitor to act in this way, but they're also prohibited to take on a claimant from any introducer knowing that the claimant has been introduced following a prohibited activity.

Adhering to SRA rules should ensure any firm isn't 'ambulance chasing' in this manner. Furthermore, any reputable firm will have measures in place to detect fraudulent claimants. Personal injury fraud reinforces a perception of a compensation culture and does very little for the plight of a genuinely injured party.

The current Justice Secretary's proposals may be an attempt to reduce the role played by any one of the parties to a personal injury claim and stop the merry-go-round that some claimants find themselves on, but they may also have an effect on people's access to justice.

What could possibly un-muddy the waters of the personal injury industry would be the banning of referral fees altogether, leaving insurers with no need for a panel of solicitors based on referral fees paid; but a panel based on service, experience and technical ability, and one that's recommended.

Nick Starling of the ABI is urging the Justice Secretary to stop referral fees, but he's not urging his own members to stop until there's an outright ban.

The market for claims management companies would disappear, and along with it unsolicited texts, calls and the compensation culture promoted by TV advertising. To this end, exaggerated and fraudulent personal injury claims will no longer be blamed for increases in insurance premiums.

For the solicitor, a ban would provide clarity about their role in the personal injury sector, and promote freedom of choice for the injured party, who'd be able to choose a solicitor based on the relative expertise of the firm, without external pressure, and giving them the ability to hold that firm to account.

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