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The controversial “no win, no fee” system of accident claims, blamed for fuelling a UK compensation culture, is to be overhauled because of concerns that it is failing consumers.

Ministers believe the system, introduced widely in 2000 when legal aid for personal injury claims was axed, is open to abuse and failing to widen access to justice.

The move comes as local authorities are reeling from the impact of thousands of equal-pay claims brought for women on a “no win, no fee” basis by one solicitor, Stefan Cross.

There has also been widespread criticism of “no win, no fee” in defamation cases in which newspapers have found themselves stung by huge costs. Media organisations complain that people can take a chance over what may be a dubious claim, at no risk to themselves, but armed with the weapon of huge costs payable by any media organisation that loses.

In 2005 the House of Lords ruled that Mirror Group Newspapers had to pay the “success” fees earned on a “no win, no fee” arrangement by the lawyers of Naomi Campbell, the supermodel.

She had successfully sued MGN for breach of confidence and the doubling of her lawyers’ fees under the “no win, no fee” deal took them to £279,981.35 — bringing MGN’s liability for Campbell’s legal costs to £1,086,295.47.

Bridget Prentice, the junior justice minister, says that there are growing concerns about how the arrangements work. She told MPs: “We are aware of growing concerns that ‘no win, no fee’ arrangements may not always be operating in the interests of access to justice.

“This includes a perception that consumer interests are not always being best served, allegations over the possible misuse of ‘no win, no fee’ agreements and a potential adverse impact on the administration of justice.

“We feel now is the appropriate time for a comprehensive, objective and evidence-based examination of the operation of ‘no win, no fee’ arrangements in relation to personal injury, employment and defamation/privacy cases.”

“No-win, no-fee” schemes — formally called conditional fees — were first allowed under the Courts and Legal Services Act of 1990 and the Access to Justice Act of 1999 extended them widely. They allow a solicitor to take a case without charge, but to increase by up to 100 per cent his normal fee if the case is successful — the “success” fee. Solicitors use some winnings in successful cases to fund the next cases.

The reality for consumers, though, is that they are still likely to end up paying costs: if they win, they may pay some of their own extra costs that the court does not order the losing side to pick up.

If they lose, they will not have to pay their lawyer but will still have to pay the costs of their successful opponent. People therefore have to take out insurance to cover themselves against the risk of having to meet any costs.

Organisations such as Citizens Advice have been urging a review of the scheme, saying that it is not widening access to justice in the way intended.

Around 2.5 million people in the UK are accidentally injured every year. But, the organisation says, far from there being a rise in consumers claiming compensation for injuries, only 31 per cent claim using legal processes. It says the actual number of claims has fallen since “no win, no fee” schemes were rolled out.

Citizens Advice says that the complex legal and financial processes involved are often misunderstood and there is “widespread mis-selling of legal and insurance products” with consumers “often induced into signing conditional fee agreements inappropriately.

“Consumers are misled into thinking the system will be genuinely ‘no win, no fee’ but can often find that costs are hidden and unpredictable.”

The costs of loan-financed insurance premiums, in addition to other legal costs, can also often erode the value of claimants’ compensation, it says.

Finally “no win, no fee” deals can create “perverse incentives for the legal profession” and encourage the cherry-picking of high-value cases with a good chance of success, leaving the smaller claims.

The scheme has spawned an industry of claims management firms and already seen some casualties.

Mark Langford was head of one of the most prominent “ambulance chasing” firms. He notoriously sacked 2,500 employees by text message, and amassed a fortune in the trade, but his Manchester-based Accident Group collapsed with £100 million in debts in 2003. The 43-year-old expatriate was killed in a car crash in Spain last year.

A report last week found that local councils are now spending more money on their legal war chests than on tackling problems that give rise to claims. An investigation by Help the Aged found that councils had an average of £250,000 each to cover potential legal costs. Yet more than eight of ten councils told the charity that they were short of money for the maintenance of kerbs, pavements and public walkways.

The “no win, no fee” review, to report in the autumn, will be led by Professor Richard Moorhead, from Cardiff Law School, Professor Paul Fenn, of Nottingham University Business School, and Professor Neil Rickman, head of economics at the University of Surrey.

But lawyers are asking: why this review now, with so many other claims-related reforms pending? A spokesman for Apil, the Association of Personal Injury Lawyers, said: “We welcome the involvement in such prestigious academics in this project but question why a review is needed at this time.”

Conditional fees have been around for more than ten years and claimant lawyers have tried to make them work. The system is now settling down, Apil says. Rather than a new review, personal injury lawyers would rather have a resolution of existing issues such as fixed costs and the claims process, not to mention damages. Let’s hope, they say, that the new review is not an excuse to put the others on hold.

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