No there are no side effects.. it's just about version history. The last version will be still used as the current version. It can have only negative effects e.g. for your editors.. who won't be able to restore older versions anymore :)
And yes, this doesn't affect already existing data. That's the reason why you should check all your settings before the website is published. You can delete existing records by deleting already existing version via UI or via API
Actually I found a user requirement for a button which would automatically delete version history according to settings - Clean version history option. If you find a button like this useful, you can add your vote for this feature. In case it gets enough votes and more users consider this idea helpful, our developers will implement it in the next version of Kentico.
Until then, you would need to use Kentico API to delete version history. It is a more safe way than deleting rows directly from the database so you do not have to worry about making any inconsistencies on DB or site level. Please see Developer's Guide - Object versioning API Examples for more details (especially DestroyVersion() and DestroyHistory() methods).
Best regards, Martin