FRE1 · Industry, Regulation and Key Parties
LO1 is the widest outcome in FRE1 and it is mostly about telling similar things apart: money markets and capital markets, primary and secondary markets, fiscal and monetary policy, the MPC and the FPC, placement and integration, insider dealing and market manipulation. Expect short scenarios where you classify what is happening (a share issue, a Bank Rate rise, a suspicious payslip, a changed bank account email) and a few calculations such as a running yield. Learn the definitions in pairs, attach each Bank of England tool to the right committee, and know the financial crime offences by statute and by what the adviser must do next.
13 min read7 sections
Checked against: Walbrook (formerly LIBF) FSRE specification v7 (July 2026), FRE1 LO1 (AC1.1-1.4); Bank of England Bank Rate page and MPC remit (bankofengland.co.uk); FPC Record July 2025; Bank of England Act 1998 s11; Building Societies Act 1986 ss6-7; POCA 2002 ss327-334; Terrorism Act 2000 ss15-18; Criminal Justice Act 1993 s52; UK MAR arts 12 and 15; Bribery Act 2010 ss1 and 7; FSCS compensation limits (fscs.org.uk); checked 11 Oct 2026. Independent prep, not endorsed by Walbrook (formerly LIBF).
Money does four jobs: a medium of exchange, a unit of account, a store of value and a standard of deferred payment. It does not hold its value automatically. Inflation erodes it, which is why the Bank of England targets 2% CPI (Bank of England Act 1998 s11).
The industry's core economic function is channelling savings to borrowers who invest in homes and businesses. Banks and building societies do this as financial intermediaries. They pool many small deposits into larger loans (aggregation) and turn instant-access deposits into 25-year mortgages (maturity transformation). They also run payment systems and, through insurers, help people manage risk.
| Market | What is traded | Exam marker |
|---|---|---|
| Money market | Short-term funds, under a year: interbank loans, Treasury bills, certificates of deposit, commercial paper | Wholesale; banks lending to each other overnight |
| Capital market | Long-term finance: shares (equities) and bonds (gilts, corporate bonds) | Both new issues and later trading are capital market |
| Primary market | New securities; the money goes to the issuer | A company listing and selling new shares |
| Secondary market | Existing securities between investors; the issuer receives nothing | Investors trading those shares a year later |
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| AIM |
| London Stock Exchange market for smaller, growing companies with lighter admission rules |
| Nominated advisers (Nomads), no minimum free float |
| Foreign exchange | Currencies, over the counter, around the clock on weekdays | World's largest market; London is the biggest centre |
| Insurance (Lloyd's) | Risks underwritten by syndicates backed by members' capital | A market, not a company, and not Lloyds Bank |
Retail markets serve individuals: mortgages, ISAs, annuities, current accounts. Wholesale markets are institutions, large companies and governments dealing with each other in large amounts. Consumer protection rules such as MCOB, COBS and the Consumer Duty (PRIN 2A) bite hardest in retail.
Trap: calling a new share issue a secondary market deal because the shares 'already exist', or calling disintermediation the normal work of a bank. Intermediation means the saver and borrower never deal directly.
Takeaway: Short-term under a year is money market, long-term shares and bonds are capital market. Primary issues new; secondary trades existing.
The four main asset classes are cash, fixed interest (bonds), equities and property, with commodities as an alternative. Higher expected long-term return comes with higher volatility.
| Asset | Return comes from | Main risk |
|---|---|---|
| Cash deposits | Interest; capital value fixed in pounds | Inflation eroding real value over long periods; FSCS covers £120,000 per person per authorised institution from 1 Dec 2025 |
| Gilts | Fixed coupon plus £100 at redemption | Price falls when market rates rise; the government guarantee covers redemption, not the price before it |
| Index-linked gilts | Coupon and redemption value uprated for inflation (RPI on existing issues) | Still move in price before redemption |
| Corporate bonds | Higher coupon than a gilt of the same term | Default risk; the extra yield is the credit spread; no FSCS cover for an issuer's default |
| Preference shares | Fixed dividend paid before ordinary dividends | Dividend only from distributable profits (Companies Act 2006 s830); usually no votes |
| Ordinary shares | Dividends and capital growth | Highest volatility; paid last on a winding up |
| Direct property | Rent and capital growth | Illiquid, indivisible, costly to trade, valuations subjective |
| Commodities | Price change only; no income | Supply and demand shocks make prices very volatile |
Two calculations come up. Running yield = annual coupon ÷ market price × 100. A bond paying £5 per £100 nominal and priced at £80 has a running yield of 5 ÷ 80 × 100 = 6.25%, not the 5% coupon. And bond prices move inversely to market interest rates: if rates rise, a fixed 4% gilt falls in price until its yield to a new buyer matches the market.
Concentration risk matters too. Holding all your savings in one company's shares, especially your employer's, means one shock can hit your job and your savings together. Collective investment schemes (unit trusts, OEICs, investment trusts) give small investors diversification.
Trap: quoting the coupon rate as the yield, or thinking a government-backed gilt cannot fall in price. The guarantee covers repayment at redemption only.
Takeaway: Rates up, bond prices down. Running yield is coupon divided by price. Equities: highest long-term return, highest volatility, paid last.
