20 questions from the MortgagePrep FRE1 bank (Industry, Regulation and Key Parties), across every FRE1 topic. Try each one, then open the answer: you get the reasoning, the rule or statute it rests on, and the trap examiners set. No sign-up needed.
Which of these is one of the recognised functions of money?
B: A store of value
Money is usually described as having four functions: a medium of exchange, a unit of account, a store of value and a standard of deferred payment (the basic economics that LIBF/Walbrook FSRE LO1 AC1.1 builds on). Money does not guarantee stable prices; inflation erodes its value, which is why the Bank of England targets 2% CPI inflation (Bank of England Act 1998 s11). Cash pays no interest and is not itself security for a loan.
The trap: Confusing what money does with what monetary policy tries to achieve.
Hundreds of savers each deposit a few thousand pounds in instant-access accounts at a building society, which lends the pooled money to home buyers over 25 years. What is this process called?
C: Maturity transformation by a financial intermediary
Financial intermediaries pool many small, short-term deposits and lend them as larger, long-term loans. Turning short-term deposits into long-term lending is maturity transformation; pooling small sums is aggregation (FSRE LO1 AC1.1). Quantitative easing is the Bank of England buying assets to support the economy. Securitisation packages loans into tradeable bonds. Disintermediation is the opposite of intermediation: borrowers going straight to investors, for example by issuing bonds.
The trap: Using 'disintermediation' to describe what is in fact intermediation.
What distinguishes the money markets from the capital markets?
C: Short-term funds lent for under a year, versus long-term funds raised through instruments such as shares and bonds
The money markets handle short-term lending and borrowing, typically for less than a year (interbank lending, Treasury bills, certificates of deposit, commercial paper). The capital markets handle long-term finance through equities and bonds (FSRE LO1 AC1.1). Both are wholesale markets used mainly by institutions, and both are regulated; neither is limited to cash or property.
The trap: Thinking 'money market' means a market in physical cash.
A retailer lists on the London Stock Exchange and sells new shares to investors to raise £50 million for new stores. A year later, investors trade those shares among themselves. Which statement is correct?
B: The new issue is primary, because the money goes to the retailer; later trading is secondary
In the primary market new securities are issued and the money raised goes to the issuer. In the secondary market existing securities change hands between investors, and the issuer receives nothing; a liquid secondary market makes investors more willing to buy in the primary market (FSRE LO1 AC1.1). Shares are long-term capital market instruments at both stages.
The trap: Reversing primary and secondary markets.
Leah, 26, rents a flat, has no savings and no debts, and has just been given a £3,000 bonus. She asks about investing it in shares. What would a sound needs-based approach suggest first?
D: Build an emergency fund in an easy-access account before investing
A needs-based approach usually puts an accessible emergency fund (often suggested as three to six months' essential spending; MoneyHelper guidance) before investing, so that an unexpected cost does not force a sale of investments at a bad time or lead to borrowing. Pension saving and protection matter too, but investing her only savings in equities or locking them away first ignores the basic need for liquidity (FSRE LO2 AC2.2). Insurers do not take premiums ten years in advance for income protection.
The trap: Jumping to investment before covering basic liquidity needs.
Omar has £4,000 in an easy-access account paying 3% and a £4,000 credit card balance charging 24% APR. He keeps the savings 'for a rainy day'. His job is secure and he has a separate £2,000 emergency fund. What is usually the best use of the £4,000?
A: Repay the credit card balance
Paying off debt costing 24% gives a guaranteed, tax-free 'return' of 24%, far more than the 3% the savings earn (MoneyHelper debt and savings guidance; FSRE LO2 AC2.2 prioritising needs). With a separate emergency fund in place, keeping the £4,000 idle costs him money. No investment can be relied on to beat 24% a year, and a fixed-rate bond still pays far less than the card costs.
The trap: Treating savings and expensive debt as separate pots that should not interact.
Callum, 34, is self-employed, has a mortgage and two children, and no employer sick pay. Which protection need is most likely to be his biggest gap?
A: Income protection to replace earnings if illness stops him working
A self-employed person has no employer sick pay and cannot claim Statutory Sick Pay, which is for employees (from 6 April 2026 £123.25 a week, gov.uk). His mortgage and family depend on his earnings, so long-term illness is his largest unprotected risk. Income protection pays a monthly benefit after a deferred period until he returns to work or the policy ends (ICOBS covers its sale). The other covers protect much smaller, non-essential risks.
The trap: Focusing on everyday insurances while missing the risk to income.
Sara and Dev have a £220,000 repayment mortgage over 25 years and two young children. Dev earns most of the household income. Which policy most directly ensures the mortgage is cleared if Dev dies?
B: Decreasing term assurance on Dev's life, over 25 years, starting at £220,000
Decreasing term assurance's sum assured reduces roughly in line with a repayment mortgage balance, so it is the usual, cost-effective way to clear a repayment mortgage on death (FSRE LO2 AC2.2 product types; sold under ICOBS). A small whole-of-life policy would not clear £220,000, buildings insurance covers damage to the property, not the borrower's death, and cover on Sara alone leaves the main earner unprotected. The family may also need level term or family income benefit for living costs.
The trap: Assuming buildings insurance or a funeral plan protects the mortgage on death.
Hassan runs a bakery through Hassan's Bakes Ltd, of which he is the sole shareholder and director. He has personally guaranteed the company's £20,000 bank overdraft, but not its trade debts. The company owes a supplier £40,000 and cannot pay. Who is liable for the supplier's debt?
B: The company alone, as a separate legal person; Hassan's loss as a shareholder is limited to the capital he put into his shares
A company registered under the Companies Act 2006 is a separate legal person: it owns its assets and owes its debts, and a shareholder's liability is limited to the amount unpaid on their shares. Hassan's guarantee is his own contract covering only the bank overdraft, so it does not reach the supplier's debt; being the only shareholder and director does not make him personally liable either, short of a rare exception such as fraud. Joint and several liability is a feature of ordinary partnerships (Partnership Act 1890 s9), not companies.
The trap: Assuming that owning and running a company alone makes the owner personally liable for its debts.
Ella and Raj are partners in an ordinary (general) partnership of mortgage brokers. Raj signs a lease for new offices on behalf of the firm without telling Ella, and the firm then defaults on the rent. What is Ella's position?
B: She is liable for the firm's debt, jointly with Raj, without limit
In an ordinary partnership each partner is an agent of the firm and is liable for the firm's debts without limit (Partnership Act 1890 ss5 and 9). A lease Raj signed for the firm's business binds the firm, so Ella shares the liability even though she did not sign. Limiting liability to capital contributed describes a limited company or a limited partner in a limited partnership, not a general partner.
The trap: Thinking a partner who did not sign a contract cannot be liable for it.
Which statement about a limited liability partnership (LLP) formed under the Limited Liability Partnerships Act 2000 is correct?
D: It is a separate legal person and its members' liability is generally limited
An LLP is a body corporate with legal personality separate from its members (Limited Liability Partnerships Act 2000 s1). It owns its own property and its members' liability is generally limited to what they agreed to contribute. It needs at least two designated members, not ten. Unlimited personal liability is the position of partners in an ordinary partnership.
The trap: Assuming 'partnership' in the name means LLP members face unlimited liability like ordinary partners.
Grace trades as a self-employed plumber under the name 'Grace Pipes'. She has not registered a company. A customer sues for faulty work. Who is the defendant?
C: Grace personally, because a sole trader and her business are the same legal person
A sole trader has no separate legal personality: the business is simply Grace trading under a name. She is personally liable for its contracts and debts without limit, and her personal assets are at risk. Registering self-employment with HMRC is a tax matter and creates no new legal person; trading names need no Companies House registration.
The trap: Treating a trading name as if it created a separate legal entity.
What regulatory structure did the Financial Services Act 1986 introduce for investment business in the UK?
D: Self-regulation within a statutory framework, overseen by the Securities and Investments Board
The Financial Services Act 1986 created 'self-regulation within a statutory framework': the Securities and Investments Board (SIB) recognised and oversaw self-regulating organisations such as LAUTRO, FIMBRA and IMRO, which authorised and supervised firms. The single regulator, the FSA, came with FSMA 2000 (fully in force 1 December 2001); twin peaks came with the Financial Services Act 2012 on 1 April 2013. Mortgage advice was not regulated by statute until 31 October 2004 (MCOB 1).
The trap: Projecting later structures (FSA, twin peaks) back onto 1986.
On which date did the Financial Services and Markets Act 2000 come fully into force, making the FSA the single statutory regulator ('N2')?
B: 1 December 2001
FSMA 2000 came fully into force on 1 December 2001, known as N2, when the Financial Services Authority took over from the SIB and the self-regulating organisations. 27 October 1986 was 'Big Bang' in the City; 31 October 2004 was when the FSA began regulating mortgage business under MCOB; 1 April 2013 was when the Financial Services Act 2012 replaced the FSA with the FCA and PRA.
The trap: Confusing N2 with the start of mortgage regulation (M-Day) or with twin peaks.
Doreen took out a first-charge residential mortgage in 2002 after receiving advice from a broker, and now believes the advice was poor. Why does the MCOB sourcebook not apply to that advice?
D: Because advising on and arranging regulated mortgage contracts only became regulated activities from 31 October 2004
Statutory regulation of first-charge residential mortgage lending, advising and arranging began on 31 October 2004 ('M-Day'), when MCOB came into force under FSMA 2000. Before then, mortgage advice was covered only by the voluntary Mortgage Code. MCOB applies to intermediaries as well as lenders, and it covers residential mortgages; most buy-to-let lending is outside it. The Consumer Duty (PRIN 2A) started on 31 July 2023 but is not the reason here.
The trap: Thinking MCOB covers mortgage advice given before October 2004.
From which date did the FSA begin regulating the sale of general insurance, including mortgage-related payment protection and buildings cover?
B: 14 January 2005
General insurance mediation came under FSA regulation on 14 January 2005 ('GI day'), with conduct rules now in ICOBS. 1 December 2001 was N2 under FSMA 2000; 6 April 2007 was when home reversion plans and home purchase plans (Islamic home finance) became regulated; 21 March 2016 was when the Mortgage Credit Directive Order brought second charge mortgages into MCOB.
The trap: Mixing up the staged dates on which different products entered regulation.
Under FSMA 2000 s1B, what is the FCA's strategic objective?
C: Ensuring that the relevant markets function well
FSMA 2000 s1B(2) gives the FCA a single strategic objective of ensuring that the relevant markets function well, advanced through three operational objectives: consumer protection, integrity and competition (s1B(3)). Safety and soundness is the PRA's general objective (s2B); integrity is one of the three operational objectives (s1D); and securing an appropriate degree of protection for consumers is one of the three operational objectives (s1C), not the strategic objective.
The trap: Swapping the FCA's strategic objective with the PRA's safety-and-soundness objective.
Which list correctly sets out the FCA's three operational objectives?
B: Securing protection for consumers, protecting the integrity of the UK financial system, and promoting effective competition
FSMA 2000 s1B(3), as amended by the Financial Services Act 2012, sets the FCA's operational objectives as the consumer protection objective (s1C), the integrity objective (s1D) and the competition objective (s1E). Safety and soundness and policyholder protection are PRA objectives (ss2B and 2C). Market confidence and public awareness were among the old FSA's objectives, and financial stability sits with the Bank of England and the FPC.
The trap: Recalling the old FSA objectives (market confidence, public awareness) instead of the current ones.
In deciding what degree of protection is appropriate for retail mortgage customers, which factor must the FCA have regard to under FSMA 2000 s1C?
A: The general principle that consumers should take responsibility for their decisions
FSMA 2000 s1C(2) lists matters the FCA must consider, including the differing degrees of risk in different transactions, consumers' differing experience and expertise, their need for timely, accurate advice and information, the general principle that consumers should take responsibility for their decisions, and that firms should provide the level of care appropriate to the risk. There is no aim of zero loss, no priority for firm profit and no general product pre-approval regime.
The trap: Thinking consumer protection means the regulator must remove all risk from consumers.
Coastline Bank is considering riskier lending to boost profits. Which objective will guide the PRA's response?
A: Its general objective of promoting the safety and soundness of the firms it regulates
The PRA's general objective is to promote the safety and soundness of PRA-authorised persons, mainly by avoiding adverse effects on UK financial stability and minimising the impact of their failure (FSMA 2000 s2B). Suitability of advice and fair value are FCA conduct matters (MCOB 4.7A; PRIN 2A Consumer Duty). Interest rates are set by the Bank's Monetary Policy Committee.
The trap: Attributing FCA conduct objectives to the PRA.
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