Solicitors who bid for personal injury business from insurers and fail to declare payments received are to face a major crackdown from their regulator.

Some lawyers have offered sums of cash as large as £10,000 for the names of injured policyholders to secure motor injury business from life insurance companies.

Essentially insurers are auctioning the names of policyholders injured in motor accidents to solicitors without the injured parties' knowledge.

However, the system has come under fire from the Solicitors Regulation Authority (SRA), the new regulator of the profession in England and Wales, which has decided to introduce what is describes as a "tough enforcement of the rules on referral arrangements".

The SRA believes that a number of solicitors are undermining public confidence in the profession and has concluded that there are some shocking breaches of the rules.

Antony Townsend, chief executive at the SRA, said: "Clients are aware that referrals have been made but what they do not understand is that money has changed hands as a result. Our process will be about empowering the consumer and stamping out abuse.

"The situation does not just impact up on the general insurance business but has also stretched into other sectors, such as conveyancing, where money has changed hands between solicitors and estate agents for referrals."

The SRA will roll out compliance reviews in May and November this year, and if it does not see significant improvement in the situation, it will consider a ban.

Norwich Union, one of the insurance firms that collect referral fees, says that it deals only with one solicitor and so is not involved in any auctioning of business, and the process is transparent. A spokesman for the group said it still believed that the referral process should be overhauled.

David Williams, of the insurer AXA, said the current system was highly flawed because the industry was built around referral fees and transparency was a serious issue.

He said: "The current arrangements are not working properly. There is no transparency. It does nothing for our industry."

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