The move by Ford 12 months' ago to offer a three-year warranty on new cars, following the trend set in the UK by smaller carmakers, forced volume rivals to take similar action.

According to Paul Barron, national sales manager, automotive retail at AA Business Services, the market "was changed overnight".

He said: "Now most cars come with a three-year warranty, either full manufacturer or split with the dealer." This had a knock-on effect in the nearly-new market, a rapidly growing sector in the motor industry, where cars are sold with the balance of the warranty intact. Three-year warranties have limited the opportunity for dealers to sell extended 12 and 24-month cover.

Mr Barron said dealers needed to broaden the range of products they offered by considering a more flexible approach to the market.

"We are in discussion with dealer groups to review their warranty sales policies and look at different solutions. It is possible to top up the manufacturer's warranty to the full three years through a flexible policy that could be renewed monthly," said Mr Barron.

"It would create a market where all used cars are sold with a full warranty, which would meet rising customer expectations. The policy could be sold individually or as part of the car package."

AA Business Services has created a 'total protection' pack for Reg Vardy, which offers customers the option of purchasing the AA's payment protection and Guaranteed Asset Protection (Gap).

It has also introduced breakdown cover to support a new three-month warranty product for Reg Vardy's used car customers.

"This is typical of the 'combination products' that dealers should be considering," said Mr Barron.

"It may mean a smaller margin per policy for us and Reg Vardy, but volumes will increase because of the enhancements for customers - penetration could possibly double."

Dealers are facing uncertainty over future legislation requirements after a Competition Commission inquiry ruled that the General Insurance Standards Council was anti-competitive.

GISC was created to regulate standards in the sale of insurance. Membership is currently voluntary but its controversial Rule 42 states that members can only deal with other members.

The Competition Commission ruled that Rule F42 was anti-competitive because it would require "a collective boycott or refusal to deal on the part of all or most of the major insurance companies in the UK".

The Commission said: "In our view, a collective boycott or refusal to supply amounts to an restriction or distortion of competition."

GISC will continue to provide consumer protection as a voluntary regulatory body while it considers its options. It is likely to appeal to the Director General of Fair Trading for an exemption under the Competition Act.

Mr Barron said: "We don't expect GISC to go away, it's just a question on when it will be implemented.

"GISC will help polarise the market. Larger companies will be able to invest in training and procedures to meet the membership criteria, but smaller companies may be forced to become agents for a member or leave the market."

Insurance experts predict GISC would be given authorisation to implement Rule F42 next year, possibly by summer.

Dealers, many with GISC applications pending, are also waiting for confirmation from the UK Government about the EU directive on consumer guarantees.

The directive, which can be implemented from January, gives consumers the right to replacement, repair or reduced cost of goods which do not "conform with the contract". These rights will apply for two years from the date of delivery. Mr Barron said: "We don't know when or how the UK Government will implement the regulations, but it is not in a position to at the moment.

"Initially the Government proposed to extend the two-year new car warranty period to used cars, but it appears to have stepped back from that view, and may instead implement the one-year cover for used cars."

Pressure from aggressive direct lenders has squeezed dealers' profit margins accelerating the need for them to diversify their product ranges.

Major dealer groups are focusing on increasing sales of relatively new add-on products, such as Gap, vehicle replacement insurance and flexible top-up warranties.

"We are having success introducing these types of products to dealers," said Mr Barron. "Some groups have quadrupled sales year-on-year."

Dealer feedback about new products suggests consumers are initially sceptical but because of the AA brand they accept them as good value and quality.

Mr Barron expects future developments to include MoT and tyre insurance, possibly linked to protection packages. "Dealers need to widen their product range with low cost, high value products," he said.

Breakdown cover is likely to become an automatic part of the warranty package, which could help dealers to retain aftersales business.

"We aim to deliver vehicles back to the dealer group's network, unless the customer specifies a different garage," said Mr Barron.

"It's about adding value to make the experience of buying a used car as close to buying new as possible."