The coalition has moved to address growing insurance costs by banning referral fees in personal injury cases.
Ministers said too many middle men were pushing up the costs for ordinary claimants and insurance policyholders by taking fees for individual cases.
Claims management companies, insurance companies, lawyers and others charging for 'referring' the claim up the line are part of Britain's growing compensation culture which the coalition is determined to tackle.
"Referral fees are one symptom of the compensation culture problem and too much money sloshing through the system," justice minister Jonathan Djanogly said.
"People are being encouraged to sue, at no risk to themselves, leaving schools, business and individuals living in fear of being dragged to the courts for simply going about daily life."
The government's plans would stop defendants having to pay a 'success fee', which reimburse the lawyer for irrelevant other cases which he or she might have lost.
In future the person making the claim will have to pay the success fee, rather than the defendant.
The Association of British Insurers welcomed the move, condemning referral fees as adding no value and encouraging "spurious and exaggerated" claims for minor injuries.
Director-general Otto Thoresen said: "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."
The changes are contained in the legal aid, sentencing and punishment of offenders bill currently working its way through parliament. They follow a consultation and Lord Justice Jackson's review of civil litigation costs.
Shadow justice minister Andy Slaughter said the move was "strange" because there is no universal definition of what constitutes a referral fee.
The Ministry of Justice said the ban would only cover the payment of fees made in personal injury cases.
Mr Slaughter added: "It is also not clear how organisations such as those campaigning for people with spinal injuries and asbestos related illnesses, who refer people to experienced lawyers in return for help with funding their activities, will be able to continue their important work if all referral fees are simply outlawed," he warned.