Insurers welcomed the government's decision to regulate the claims management sector as "a step forward" in looking at the issue of compensation in a coordinated manner.

But formal regulation could take as long as two years to introduce, provided Labour wins the forthcoming election, due to pressure on the legislative timetable. This is despite the promise to introduce a white paper on the issue before the end of the year.

In a speech on Tuesday, the Lord Chancellor Lord Falconer said claims management companies (CMCs) had "failed to demonstrate anything like the commitment that I would have hoped to have seen by now".

He said formal regulation of the industry would be introduced in the reform of legal services.

"I envisage a front line regulator with oversight by the legal services board. That front line regulator could be the Claims Standards Council if it can make sufficient progress and is judged fit for purpose by the legal services board."

Norwich Union director of technical claims Dominic Clayden and AXA claims manager David Williams both expressed their support for the proposals, and Lord Falconer's comprehensive approach to the compensation issue.

CSC chief executive Anthony Burns-Howell said no decision had been taken on whether the CSC would seek the role of statutory regulator. He said the CSC would seek to support consumers and CMCs during the transition to statutory regulation, as well as developing best practice procedures and codes of conduct for the industry.