Tyre stretching came about because of a loop hole in the law that states no part of the tyre tread may protrude beyond the bodywork, unless covered by a suitable flare/ overfender.
The idea being your wheels can stick out and yet your car is legal. It's basically a middle finger to the law.
It's also entriely possible that a car on stretched rims can be 100% legal. It comes down to the wheel size and offset and how much devation from stock is allowed. With a set of overfenders, that offset should be OK. The law appears to be quite vague on the subject of offset.
As for the stretched tyres, the manufactures publish 'guidelines' as to acceptable tyre width to rim width fitments. Straying outside these guidelines absolves the tyre manufacturer from liability in case of an accident, but a far as I can tell, there's no strict legal requirement to follow them. It the tyre fitter has stretched the tyres and not made the customer sign a waiver, then the fitter has taken on that liability. I know that if you go to a big chain here, they won't do anything that's even remotely suspect, but the independants will do just about whatever you want.
In Australia, as long as the car is legal, there's no requirement to inform the insurance company (unless they're over $800 in my case and you want them specifically covered), but I understand the UK is quite different in that regard.