Referral fees for personal injury cases will be banned to help tackle rising insurance costs.
Currently, insurance companies sell personal injury details to lawyers who then seek compensation claims against other insurers. This causes insurers to hike up premiums to cover the costs of these compensation claims.
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. Many of the claims are spurious and only happen because the current system allows too many people to profit from minor accidents and incidents.'
According to the Association of British Insurers, for every 1 insurers pay in compensation in low-value personal injury motor accident claims, a further 87p is paid to claimant lawyers.
UK consumers pay 2.7 million every day to claimant lawyers through their motor insurance premiums that is 10% of every motor premium. The ABI also says that the number of injury claims received by insurers has risen 72% between 2002 and 2010.
'We will ban referral fees and we will go further,' said Djanogly. 'This will make claimants think harder about whether to sue. It will give insurance companies and business generally an incentive to pass the savings onto customers through lower prices.'
The Government says it's changing the law so anyone making a claim will have to pay the success fee, rather than the defendant - and that fee will be capped.
The intended result is a fairer split of costs between parties, and lower legal costs overall, meaning lower costs for customers and taxpayers.
Otto Thoresen, the ABI's director general, said: 'Insurers are acutely aware of the impact that higher motor insurance premiums have for their customers.
'This is why the industry is doing everything possible to reduce costs, for example by campaigning for compensation reform to tackle excessive legal costs and frivolous claims, and setting up the Insurance Fraud Register to further reduce fraud.'
The plans are part of a Legal Aid, Sentencing and Punishment of Offenders Bill. The Bill is currently at the committee stage. The committee will report to the House of Commons in October.
The OFT said it will examine the role of price-comparison sites, credit hire replacement vehicles, insurance companies use of approved repairers and add-on products sold with standard motor insurance cover.
It will also look into reports that car insurance premiums in Northern Ireland are significantly higher than they are in the rest of the UK.