UK car dealers could unwittingly break new insurance regulations if they use a loophole in the rules, the Retail Motor Industry Federation (RMI) said.

From 14 January 2005, insurance sales are to be regulated and those that sell insurance products such as credit protection insurance, GAP products, and general motor insurance will need to enrol with the Financial Services Authority (FSA). However warranties provided by dealers as part of the sale of goods will not be considered insurance.

Although the regulations seem to offer dealers a loophole, allowing them to avoid registration with the FSA, RMI business development specialist Louise Wallis sees problems for any dealer that takes this option.

“The FSA’s decision to exclude this kind of warranty has been welcomed by many parts of the trade as it will give some scope for dealers to avoid regulation, but as they have failed to clarify their definition of an insurance product it is impossible with any certainty say what is included within regulation and what is not.

“The FSA have stated that it is for the courts to decide what constitutes insurance. Dealers need to know whether the products they provide are insurance or not. Any dealer who remains unregulated and provides a guarantee style warranty runs the risk that the FSA claim they are in breach of regulations and are acting illegally.”

Dealers derive a great deal of their profits from the sale of insurance, and a large chunk would be at stake for those that fail to register, so they should act now to make sure they are ready for the new regime, the RMI suggested.