Those who use information gathered by unlawful unsolicited calls and texts, waste people's time and money by making spurious claims or use misleading marketing could be fined up to 20% of annual turnover, justice minister Lord Faulks said.
Fines will be based on company turnover and the nature of the offences, meaning they could stretch to millions of pounds.
Lord Faulks said: "No longer should claims companies be able to plague hardworking people and waste everyone's time.
"The scale of these fines shows just how serious we are about stopping them.
"This is also good news for the reputable firms, as it will boost confidence in the services pro-vided by the sector."
The fines, due to be introduced later this year, will be levied by the Claims Management Regulation (CMR) unit at the Ministry of Justice (MoJ).
CMR head Kevin Rousell said: "These fines will help drive malpractice out of the industry and improve the reputation for those who do follow the correct procedures."