FRE2 · Skills, Principles and Ethical Behaviours
This topic is FRE2 AC7.1: applying regulatory principles to get fair outcomes for customers. Expect scenario questions that ask which Principle, Conduct Rule or Consumer Duty outcome a set of facts engages, plus questions on the COBS headline rules, inducements, market abuse, senior management accountability and unfair contract terms. Most wrong answers use an outdated count (11 Principles, 5 Conduct Rules), treat the Duty as price regulation, or forget that the Duty only covers retail customers. Learn the 12 Principles by number and short name, the Duty's 3 cross-cutting rules and 4 outcomes, and the dates 31 July 2023 and 31 July 2024.
13 min read7 sections
Checked against: Walbrook (formerly LIBF) FSRE specification v7 (July 2026), FRE2 LO7 AC7.1; FCA Handbook PRIN 2.1.1R, PRIN 2A, PRIN 3.2.10R, PRIN 3.4.4R, COBS 2.1, 2.3, 4.2, MCOB 2.3, COCON 2; FCA PS22/9 and FG22/5; UK MAR; CJA 1993; FSMA 2000; Consumer Rights Act 2015 Part 2; DMCCA 2024 Part 4; checked 11 Oct 2026. Independent prep, not endorsed by Walbrook (formerly LIBF).
The Principles are the FCA's high-level rules for every authorised firm (PRIN 2.1.1R). They sit in the High Level Standards block of the Handbook, and the FCA can discipline a firm for breaching one even where no detailed rule covers the facts. Learn them by number and short name: exam questions describe a failing and ask which Principle it breaches.
| No. | Short name | What the firm must do |
|---|---|---|
| 1 | Integrity | Conduct its business with integrity |
| 2 | Skill, care and diligence | Conduct its business with due skill, care and diligence |
| 3 | Management and control | Organise and control its affairs responsibly and effectively, with adequate risk management systems |
| 4 | Financial prudence | Maintain adequate financial resources |
| 5 | Market conduct | Observe proper standards of market conduct |
| 6 | Customers' interests |
Every note. Every question. One pass.
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On 31 July 2023 for products and services open to sale or renewal, and on 31 July 2024 for closed products and services (FCA PS22/9; PRIN 2A).
Products and services, price and value, consumer understanding, and consumer support (PRIN 2A.3 to 2A.6).
| Pay due regard to customers' interests and treat them fairly |
| 7 | Communications with clients | Pay due regard to clients' information needs; communicate clearly, fairly and not misleadingly |
| 8 | Conflicts of interest | Manage conflicts fairly, between itself and customers and between clients |
| 9 | Customers: relationships of trust | Take reasonable care that advice and discretionary decisions are suitable for customers who rely on its judgement |
| 10 | Clients' assets | Arrange adequate protection for clients' assets it is responsible for |
| 11 | Relations with regulators | Deal with regulators openly and cooperatively; disclose anything they would reasonably expect notice of |
| 12 | Consumer Duty | Act to deliver good outcomes for retail customers (from 31 July 2023) |
How they fit together. Where the Duty applies, Principle 12 and PRIN 2A replace Principles 6 and 7 (PRIN 3.2.10R). Principles 6 and 7 still apply to non-retail clients, such as a professional client. Principle 9 (suitability) and Principle 8 (conflicts) keep applying alongside the Duty. A breach of PRIN gives no private right to sue under FSMA 2000 s138D (PRIN 3.4.4R).
Trap: answering '11 Principles' or picking Principle 6's 'treat customers fairly' for a retail case after 31 July 2023, when Principle 12 is the live standard.
Takeaway: Twelve Principles. Number 12 is the Consumer Duty. Where it applies, Principles 6 and 7 switch off; elsewhere they still bite.
The Duty has three layers (PRIN 2A). Principle 12 sets the standard: act to deliver good outcomes for retail customers. Three cross-cutting rules say how to behave. Four outcomes say where the FCA will look. It came into force on 31 July 2023 for open products and services and on 31 July 2024 for closed books (FCA PS22/9).
| Layer | Content | Source |
|---|---|---|
| Cross-cutting rule 1 | Act in good faith: honesty, fair and open dealing, consistent with customers' reasonable expectations | PRIN 2A.2.1R |
| Cross-cutting rule 2 | Avoid causing foreseeable harm (not all harm: accepted inherent risk is not a breach) | PRIN 2A.2.8R, 2A.2.13G |
| Cross-cutting rule 3 | Enable and support retail customers to pursue their financial objectives | PRIN 2A.2.14R |
| Outcome 1 | Products and services: target market, product approval, testing | PRIN 2A.3 |
| Outcome 2 | Price and value: fair value assessments by manufacturers; distributors' charges consistent with fair value | PRIN 2A.4 |
| Outcome 3 | Consumer understanding: communications customers can understand, tested where appropriate | PRIN 2A.5 |
| Outcome 4 | Consumer support: no unreasonable barriers to switching, cancelling or complaining | PRIN 2A.6 |
Scope. The Duty covers retail customers only. It applies across the whole distribution chain to any firm that can determine or materially influence retail customers' outcomes, even without a direct customer relationship (FCA FG22/5 paras 2.12 and 2.18). A fund manager selling only through advisers is caught.
Trap: thinking 'avoid foreseeable harm' makes a firm liable for any investment loss. PRIN 2A.2.13G says the Duty does not require firms to prevent all harm.
Takeaway: Principle 12, three cross-cutting rules, four outcomes. Open products 31 July 2023, closed 31 July 2024. Retail customers, whole distribution chain.
