The House of Lords has blocked attempts to exempt charities and trade unions from the referral fee ban. The house was debating proposed amendments to the Legal Aid, Sentencing and Punishment of Offenders bill.

Labour peer Lord Beecham told the house there was a 'world of difference' between referral fees boosting profits for claims management companies and those providing funds for not-for-profit groups. He agreed with the government's proposed ban on referral fees for personal injury claims when applied to commercial organisations.

Beecham argued charities and trade unions rely on fees paid by solicitors and are not involved in the negative aspects the bill sought to address.

But the government comfortably defeated the amendment by 257 votes to 173. Baroness Deech, chair of the Bar Standards Board, described payments by solicitors as the 'evil of referral fees'. She argued the practice pushed up costs, encouraged poor service and deprived the consumer of choice.

She told the house that 'even where worthwhile charities are concerned, the bad nature of referral fees spreads throughout the system'.

Labour also suffered defeat during day five of the report stage when an amendment to make referral fee payment a criminal offence was not moved. The government has said it intends to police the ban through regulators like the Financial Services Authority and Solicitors Regulation Authority.

Speaking at the Claims Management Conference in Manchester today, Law Abroad chairman Kerry Underwood said the government's stance may change if solicitors flout the rules.

'90% of law firms have never paid a referral fee of any kind so don't expect any sympathy if you breach the ban,’ he said. 'If you think it's clever to find a way of getting round the ban you're in for a nasty shock. There will be an amendment to the act and you will end up in prison.'

The LASPO bill has its third reading in the House of Lords on 27 March before moving back to the Commons on 17 April.