It really is that simple, the O.P. is now aware of possible danger to others or loss to themselves (by flooding) they have a duty of care to others and their own insurers to correct the pipework A.S.A.P. establishing who is at fault is a job for later.
Spot on. Now that you are aware of the issue,
simjohnson, you need to have it rectified, or, should the worst happen and someone is scalded by discharge, you will share the burden of responsibility.
I wouldn't allow the developer to fob you off, though, as the defective installation is neither minor nor trivial, it is in direct contravention of Building Regs which carry the full force of the law.
The fact that Local Authority Building Control signed the work off is irrelevant. They do not as a matter of routine check the work of people on Competent Persons Schemes. That is the purpose of these schemes, to allow people who have proved their competence through things like Gas Safe registration, or having an Unvented (G3) qualification, to certify their own work. The installer either had the qualification and failed to comply with Regs, in which case he's liable, or he didn't inform LABC that the installer wasn't G3 certified and thus needed signoff. Either way, the developer is liable.
There is some merit in what he says, though - unvented cylinders should be seviced annually, as should boilers. Had this been done, the fault may have been spotted sooner. In any case, it doesn't absolve him of responsibility. As has been mentioned earlier, the description "latent defects" covers this sort of scenario, where faulty installations are hidden and only become apparent later when they give rise to problems.
I'd suggest asking the Local Authority Building Control to come and inspect the work. Despite it being signed off, they will take action for non-compliance. The HSE may also be interested in this type of installation due the potential for serious injury.
However, legal action will be expensive, drawn-out and stressful. You pays yer money and takes yer choices. Good luck!