Strict new rules aimed at cracking down on car finance frauds come into force next month, requiring dealers to run tight ID checks on all credit applicants.

The number of fraudulent transactions increased by 6.1 per cent between 2001 and 2003. The Finance and Leasing Assocation says its members – who account for more than half the UK's new car sales, signed £15m worth of fraudulent deals in 2002.

“Motor finance fraud has become a huge issue and everybody except the fraudsters loses out,” says Martin Hall, director general of the FLA.

Now the association is asking retailers to check that all applicants for finance have a valid driving licence. It is co-ordinating the delivery of more than 28,000 ultra violet lamps to dealers. The lamps, which cost retailers between £5 and £10 each, show up a royal coat of arms on the newer photocard licences.

Retailers must also check for a watermark of the DVLA logo on old-style paper licences, which still make up half of those in circulation. And they must sign a declaration showing they have checked the applicant's licence – if they don't finance houses won't pay up.

Applicants will have to produce a current cheque guarantee card, credit card or employer's security pass incorporating a photo. The new regime only applies to claims from consumers, sole traders and small partnerships – not limited companies or larger partnerships.