The FCA and PRA are the subject of two learning outcomes in CeMAP® FRE1, the first unit of CeMAP 1 (FSRE) set by Walbrook (LIBF). LO4 (AC4.1) covers how UK financial regulation developed between 1986 and 2021. LO5 (AC5.1 and AC5.2) covers the FCA's and PRA's objectives, powers and rulebook. Everything on this page is UK-wide: the FCA and PRA regulate firms in England, Wales, Scotland and Northern Ireland alike. For where these outcomes sit in the module, see the CeMAP 1 (FSRE) hub, and for the full unit format, the FRE1 unit guide.
The relevant FRE1 criteria, as worded in the FSRE qualification specification, are:
| Criterion | Official sub-bullets |
|---|---|
| AC4.1 | History of UK regulation from 1986 to 2021; UK regulatory framework; other regulators; additional senior management oversight, auditors, trustees, external compliance support |
| AC5.1 | Statutory and operational objectives of the FCA and PRA; principles-based regulation and its implications; regulators' duties and powers of enforcement |
| AC5.2 | Purpose and structure of the Handbook; high-level standards; T&C regime; prudential standards; COBS; CASS; SM&CR; regulatory processes; regulated activities and authorisation requirements |
What are the FCA and the PRA?
The FCA and the PRA are the UK's two financial regulators, set up on 1 April 2013. The Financial Conduct Authority regulates the conduct of every authorised firm. The Prudential Regulation Authority, part of the Bank of England, supervises deposit-takers, insurers and major investment firms.
This split is called "twin peaks" regulation: one peak for conduct, one for prudential soundness. It replaced the single-regulator model of the Financial Services Authority (FSA).
| FCA | PRA | |
|---|---|---|
| Type of regulation | Conduct (how firms treat customers and markets) | Prudential (capital, liquidity, safety) |
| Legal status | Independent body, accountable to HM Treasury and Parliament | Part of the Bank of England |
| Firms covered | All authorised firms for conduct; solo-regulated firms for prudential too | Deposit-takers, insurers, major investment firms |
| Mortgage relevance | Writes MCOB, regulates advisers, brokers and lenders' sales | Supervises lenders' capital and the LTI flow limit with the Bank's FPC |
A firm the PRA supervises is "dual-regulated": the PRA handles its prudential rules and the FCA its conduct. A mortgage broker or independent advisory firm is "solo-regulated" by the FCA alone. Both regulators are funded by fees paid by the firms they regulate.
Key fact: The FCA is not part of the Bank of England. The PRA is. Exam options that place the FCA inside the Bank are wrong.
How did UK financial regulation develop from 1986 to 2021?
UK financial regulation developed in four stages: statutory self-regulation under the Financial Services Act 1986, a single regulator (the FSA) under FSMA 2000 from 1 December 2001, the FCA and PRA from 1 April 2013, and post-Brexit onshoring by 2021.
The 1986 Act set up the Securities and Investments Board, which recognised self-regulating organisations for different parts of the industry. After a run of mis-selling scandals, the government created one regulator. The Financial Services and Markets Act 2000 gave the FSA its statutory powers and came fully into force on 1 December 2001.
| Date | Event |
|---|---|
| 1986 | Financial Services Act 1986 (now repealed): self-regulation within a statutory framework |
| 1 Dec 2001 | FSMA 2000 fully in force; the FSA becomes the single regulator; the FOS and FSCS start work |
| 31 Oct 2004 | Mortgage regulation begins: lending and advice on regulated mortgage contracts come under MCOB |
| 2007 | Home reversion plans become regulated |
| 31 Dec 2012 | Retail Distribution Review: adviser charging for investment advice |
| 1 Apr 2013 | Financial Services Act 2012: the FSA is replaced by the FCA and the PRA |
| 2014 | Consumer credit regulation moves from the Office of Fair Trading to the FCA |
| 26 Apr 2014 | Mortgage Market Review rules on affordability and advised sales |
| 21 Mar 2016 | Mortgage Credit Directive: the ESIS replaces the KFI; second charge mortgages move into MCOB |
| 9 Dec 2019 | SM&CR extends to all solo-regulated firms |
Sources: legislation.gov.uk for the Acts and commencement orders; the FCA Handbook for the MCOB and MMR dates.
The 2008 financial crisis drove the move to twin peaks. Regulators had focused on conduct and missed the build-up of risk in banks, so prudential supervision went back to the Bank of England. Much UK regulation also came from EU law, such as the Mortgage Credit Directive. When the Brexit transition ended on 31 December 2020, that law was kept as UK law. For the mortgage-specific milestones in detail, see our MCOB rules guide.
Two later events sit outside the 2021 end point but matter now. The Financial Services and Markets Act 2023 gave both regulators a secondary objective on competitiveness and growth from 29 August 2023, and the Consumer Duty took effect on 31 July 2023.
Other regulators and oversight (AC4.1)
The FCA and PRA are not the only bodies. The syllabus also expects you to know other regulators, such as the Information Commissioner's Office for data protection and The Pensions Regulator for workplace pensions, and the Bank of England's Financial Policy Committee for financial stability. Inside firms, oversight comes from senior management, internal and external auditors, trustees (for example of pension schemes) and external compliance consultants.
Exam tip: Separate passing from commencement. FSMA received Royal Assent in 2000 but only came fully into force on 1 December 2001. "When did the FSA gain its statutory powers?" means the commencement date.
What are the FCA's and the PRA's statutory objectives?
The FCA's objectives are set in FSMA 2000 section 1B: one strategic objective, that relevant markets function well, and three operational objectives: consumer protection, market integrity and effective competition. The PRA's general objective, in section 2B, is the safety and soundness of PRA-authorised firms.
The FCA's objectives
| Objective | What it means |
|---|---|
| Strategic | Ensuring that the relevant markets function well |
| Consumer protection (operational) | Securing an appropriate degree of protection for consumers |
| Integrity (operational) | Protecting and enhancing the integrity of the UK financial system, including against financial crime |
| Competition (operational) | Promoting effective competition in the interests of consumers |
| Secondary (from 29 Aug 2023) | Facilitating the international competitiveness of the UK economy and its growth in the medium to long term |
The FCA must act compatibly with its strategic objective and advance at least one operational objective in everything it does. The secondary objective applies "so far as reasonably possible" alongside them.
The PRA's objectives
| Objective | What it means |
|---|---|
| General | Promoting the safety and soundness of PRA-authorised persons, mainly by avoiding harm to UK financial stability and limiting the damage a failing firm would cause |
| Insurance | Contributing to an appropriate degree of protection for insurance policyholders |
| Secondary: competition | Facilitating effective competition in the markets PRA firms serve |
| Secondary: competitiveness and growth (from 29 Aug 2023) | Facilitating the UK economy's international competitiveness and growth, subject to international standards |
The wording comes from sections 1B and 2H of FSMA 2000, as amended.
Key fact: Competition is an operational objective for the FCA but only a secondary objective for the PRA. An option giving the PRA a "competition operational objective" is a trap.
What is principles-based regulation?
Principles-based regulation is the FCA's approach of setting high-level outcomes, such as the 12 Principles for Businesses, and holding firms responsible for achieving them, rather than relying only on detailed rules that firms can comply with technically while still causing harm.
In practice the FCA combines principles with detailed rules. MCOB, for example, contains precise rules on affordability and disclosure, but a firm that meets every rule can still breach a Principle if the outcome for customers is poor. The approach has three implications the syllabus expects you to understand:
- Judgement. Firms must interpret what the principles require in their own business, which needs strong senior management and compliance functions.
- Outcomes. Supervision looks at results for customers, not just whether a form was completed. The Consumer Duty, Principle 12, pushes this further by requiring good outcomes for retail customers.
- Enforcement. The FCA can discipline a firm for breaching a Principle alone, without pointing to a specific broken rule.
The Consumer Duty is not named in the FRE1 syllabus. It is taught in FRE2 under "harm to consumers", which is why our FRE2 unit guide covers it in more depth.
Exam tip: If a question says a firm "followed every rule" but customers still lost out, the answer usually turns on the Principles, not on a specific rule.
How is the FCA Handbook organised?
The FCA Handbook is organised into blocks of sourcebooks, each with a short code. FRE1 AC5.2 needs five: High Level Standards (PRIN, SYSC, COCON), Prudential Standards, Business Standards (COBS, MCOB, ICOBS, CASS), Regulatory Processes (SUP, DEPP) and Redress (DISP, COMP).
| Block | Sourcebooks you need for CeMAP |
|---|---|
| High Level Standards | PRIN (Principles for Businesses), SYSC (systems and controls), COCON (Conduct Rules), FIT (fit and proper test), TC (Training and Competence) |
| Prudential Standards | Capital and liquidity rules, for example MIPRU for mortgage and insurance intermediaries |
| Business Standards | COBS (investments), MCOB (mortgages and home finance), ICOBS (insurance), CASS (client assets) |
| Regulatory Processes | SUP (supervision), DEPP (decision procedure and penalties) |
| Redress | DISP (complaints and the FOS), COMP (the FSCS) |
Every provision carries a status letter. R is a rule, binding on firms. E is an evidential provision: complying tends to show compliance with a rule, and breaching it tends to show a breach. G is guidance, which explains rules but is not binding. You can browse every sourcebook on the FCA Handbook site.
What the named sourcebooks do
- T&C regime. The TC sourcebook requires firms to make sure staff are competent, supervised and, for activities such as mortgage advice, hold an appropriate qualification. CeMAP is one. Passing it does not on its own allow unsupervised advice: the firm must assess the adviser as competent.
- COBS. Conduct of business rules for investment business: client categorisation, communications, suitability and adviser charging.
- CASS. Client money and assets must be kept separate from the firm's own, so they are protected if the firm fails.
- Prudential standards. Minimum capital and professional indemnity insurance, so that a firm can meet its liabilities.
Regulated activities and authorisation
Section 19 of FSMA 2000 sets the general prohibition: no one may carry on a regulated activity in the UK unless they are authorised or exempt. Breaching it is a criminal offence, and an agreement made in breach may be unenforceable. Regulated activities are listed in the Regulated Activities Order and include advising on, arranging and entering into regulated mortgage contracts. A firm applies for Part 4A permission for the specific activities it will carry on. Appointed representatives are exempt because a principal firm takes responsibility for them.
Key fact: "G" provisions are guidance and are not binding. An option calling FCA guidance a binding rule is wrong.
What are the Principles for Businesses?
The Principles for Businesses are the 12 high-level obligations in PRIN 2.1.1R that apply to every authorised firm. Principle 12, the Consumer Duty, was added on 31 July 2023 and requires firms to act to deliver good outcomes for retail customers.
| No. | Principle (short form) | A firm must… |
|---|---|---|
| 1 | Integrity | Conduct its business with integrity |
| 2 | Skill, care and diligence | Act with due skill, care and diligence |
| 3 | Management and control | Organise its affairs responsibly, with adequate risk management |
| 4 | Financial prudence | Maintain adequate financial resources |
| 5 | Market conduct | Observe proper standards of market conduct |
| 6 | Customers' interests | Pay due regard to customers' interests and treat them fairly |
| 7 | Communications | Communicate in a way that is clear, fair and not misleading |
| 8 | Conflicts of interest | Manage conflicts fairly |
| 9 | Relationships of trust | Ensure the suitability of advice and discretionary decisions |
| 10 | Clients' assets | Protect clients' assets it is responsible for |
| 11 | Relations with regulators | Be open and cooperative and disclose what the regulator would expect |
| 12 | Consumer Duty | Act to deliver good outcomes for retail customers |
Where the Consumer Duty applies, Principles 6 and 7 do not, because Principle 12 sets the higher standard. The Duty took effect on 31 July 2023 for open products and on 31 July 2024 for closed products, as the FCA's Consumer Duty page explains.
Exam tip: Match the scenario to one Principle. Misleading advertising is Principle 7; failing to tell the FCA about a serious problem is Principle 11; poor systems are Principle 3.
What is the Senior Managers and Certification Regime?
The Senior Managers and Certification Regime (SM&CR) is the FCA and PRA framework of individual accountability. It reached banks in March 2016, insurers in December 2018 and all solo-regulated firms, including mortgage brokers, on 9 December 2019. It has three parts.
- Senior Managers Regime. People in the most senior roles, such as the chief executive or compliance oversight, hold Senior Management Functions. The regulator must approve them before they start. Each has a Statement of Responsibilities and a "duty of responsibility" to take reasonable steps to prevent breaches in their area.
- Certification Regime. Staff whose roles could cause significant harm, including mortgage advisers dealing with customers, are not approved by the FCA. Instead the firm certifies each year that they are fit and proper.
- Conduct Rules. The COCON rules apply to almost all staff. The individual rules require integrity, due skill, care and diligence, openness with regulators, proper market conduct and, since the Consumer Duty, acting to deliver good outcomes for retail customers. Senior managers have four extra rules.
Solo-regulated firms fall into core, limited-scope or enhanced tiers. Most mortgage intermediaries are core firms. The regime replaced the old Approved Persons Regime. The FCA has since published reforms to parts of the regime, so check its SM&CR page for the current detail.
Key fact: Under the Certification Regime, the firm certifies the adviser as fit and proper each year. The FCA approves only Senior Managers.
What enforcement powers do the regulators have?
The FCA's enforcement powers under FSMA 2000 include unlimited fines (section 206), public censure (section 205), prohibition orders (section 56), varying or cancelling a firm's permission, restitution, injunctions and criminal prosecution for offences such as carrying on regulated activities without authorisation.
| Power | Purpose |
|---|---|
| Financial penalty | Punish and deter a firm or individual for a breach |
| Public censure | Name a firm or person publicly, instead of or with a fine |
| Prohibition order | Ban an individual from some or all regulated functions |
| Vary or cancel permission | Restrict or end what a firm may do |
| Restitution and redress schemes | Make firms repay customers who lost out |
| Injunctions | Stop a breach or freeze assets through the courts |
| Skilled person review (section 166) | Require an independent report on a firm |
| Criminal prosecution | For example unauthorised business, insider dealing or misleading statements |
The PRA has similar disciplinary powers for its own firms and rules. Enforcement decisions follow the process in DEPP, and a firm or person can refer a decision to the Upper Tribunal. Consumers who lose out usually seek redress through the firm's complaints process and the Financial Ombudsman, or the FSCS if the firm has failed; our FSCS and FOS guide covers both. Financial crime, a separate FRE1 topic, is explained in our anti-money laundering guide.
Exam tip: A prohibition order bans a person. Cancelling permission stops a firm. Questions often swap the two.
Your FRE1 regulation study plan
Your FRE1 regulation study plan should take about one week of the four-week FRE1 timetable: two days on the LO4 timeline, three on the LO5 objectives, Handbook and SM&CR, then timed questions until you score 85% or more three times in a row.
- Day 1. Take the free FRE1 diagnostic to see where regulation sits among your weak spots.
- Day 2. Learn the timeline table above as a story: self-regulation, one regulator, mortgages added, twin peaks, tougher mortgage rules. Then drill it with the regulatory history topic practice.
- Day 3. Write out the FCA and PRA objectives from memory, then the 12 Principles. Check against the tables.
- Day 4. Handbook codes and SM&CR. Match ten sourcebook codes to their purpose without looking.
- Day 5. Run the FCA, PRA and Handbook topic drill and review every wrong answer's rule reference.
- Day 6 or 7. Sit the free FRE1 mock 1 under the real timing: 40 questions in 60 minutes, 28 to pass.
The sample questions below come from our FRE1 bank. Topic drills and mocks 2 to 10 are part of Pro, at £6.99 a week, £11.99 a month or £22.99 for three months, covering all five units. Our readiness rule matches the app: three mocks in a row at 85% or more, with every topic at 80% or more. It is a guide to readiness, not a pass guarantee. Once regulation is solid, move on to the FRE2 topics that build on it, starting with complaints and compensation.
10 free FRE1 practice questions with answers
Try each one, then open the answer. For a timed experience use the free mock exam.
1. Funds already in the banking system are moved quickly through a chain of overseas accounts and shell companies to hide where they came from. Which stage of money laundering is this?
- A. Layering
- B. Placement
- C. Integration
- D. Structuring
Show answer
A. Layering
Layering is the second stage, in which a series of complex transactions separates criminal proceeds from their source and makes the audit trail hard to follow. Shell companies and transfers across borders are common techniques. Placement has already happened because the funds are in the system.
2. Under an interest in possession trust, what is the income beneficiary entitled to?
- A. To take the trust capital whenever she chooses
- B. To whatever income the trustees decide to pay
- C. To nothing until the trust ends
- D. To all trust income as it arises, less expenses
Show answer
D. To all trust income as it arises, less expenses
The trustee must pass all trust income to the interest in possession beneficiary as it arises, less expenses. That beneficiary has no right to the capital itself.
3. Which section of FSMA gives the FCA its general power to make the rules found in its Handbook?
- A. Section 19
- B. Section 137A
- C. Section 166
- D. Section 56
Show answer
B. Section 137A
FSMA s137A gives the FCA power to make general rules that apply to authorised persons, where necessary or expedient to advance its operational objectives. Other sections give specific rule-making powers.
4. Why does a 90-day notice savings account usually pay a higher rate than an instant-access account from the same provider?
- A. It is covered by a higher FSCS limit
- B. Its interest is always tax-free
- C. The saver gives up immediate access to the money
- D. Its capital can grow with the stock market
Show answer
C. The saver gives up immediate access to the money
Notice accounts require the saver to give notice, often between 30 and 120 days, before withdrawing, or to pay a penalty. In return for this loss of access, providers usually pay a higher rate than on instant-access accounts. MoneyHelper sets out this trade-off.
5. A grandmother puts £20,000 into a bare trust for her 10-year-old granddaughter in England. When can the granddaughter demand the assets?
- A. At 16
- B. When the trustees decide
- C. At 18
- D. At 25
Show answer
C. At 18
Under a bare trust the beneficiary has an absolute right to the capital and income. In England and Wales they can take the assets at 18 (16 in Scotland). The trustees have no discretion over who benefits.
6. Under COBS 3, into which three categories are clients classified?
- A. Retail client, professional client, eligible counterparty
- B. Private client, business client, corporate client
- C. Consumer, small business, wholesale customer
- D. Basic client, advised client, discretionary client
Show answer
A. Retail client, professional client, eligible counterparty
COBS 3 classifies clients as retail clients, professional clients or eligible counterparties. The level of protection, such as disclosure and suitability rules, depends on the category.
7. In 2004 Margaret signed an enduring power of attorney appointing her son. She is now showing signs of dementia and losing capacity. What must her son do?
- A. Nothing, as EPAs became invalid in 2007
- B. Apply to the Court of Protection to be made her deputy
- C. Apply to register the EPA with the Office of the Public Guardian
- D. Ask her to sign a new LPA to replace it
Show answer
C. Apply to register the EPA with the Office of the Public Guardian
An attorney under an EPA must apply to register it with the Office of the Public Guardian when the donor is losing, or has lost, mental capacity. Before applying, the attorney must notify the donor and certain relatives, who can object.
8. What does private medical insurance pay for?
- A. A replacement income during illness
- B. A lump sum on diagnosis of a serious illness
- C. The cost of private treatment for eligible conditions
- D. Long-term residential care fees
Show answer
C. The cost of private treatment for eligible conditions
Private medical insurance covers the cost of private medical treatment for eligible conditions, giving the policyholder more choice over when and where they are treated. It does not replace income. MoneyHelper notes it may not be a priority for people with debts and no savings.
9. What is the main aim of a liquidity requirement for a firm?
- A. To ensure it makes a profit each year
- B. To ensure its staff are competent
- C. To ensure its advice is suitable for customers
- D. To ensure it can meet its obligations as they fall due
Show answer
D. To ensure it can meet its obligations as they fall due
Liquidity rules require firms to hold enough liquid assets and stable funding to meet payments as they fall due, including under stress. A firm can be solvent but still fail if it runs out of cash.
10. Under barter, a farmer who wants shoes must find a shoemaker who happens to want his vegetables. Which function of money removes this problem?
- A. Unit of account
- B. Standard of deferred payment
- C. Medium of exchange
- D. Store of value
Show answer
C. Medium of exchange
Barter needs a 'double coincidence of wants': each party must want what the other offers. Money solves this by acting as a medium of exchange that everyone accepts, so the farmer can sell to anyone and buy shoes from anyone. This is one of the three functions of money described by the Bank of England.
Frequently asked questions
+What is the difference between the FCA and the PRA?
The PRA is a prudential regulator: it makes sure the banks, building societies and insurers it supervises are safe and sound. The FCA is a conduct regulator: it sets the rules on how all authorised firms treat customers and behave in markets. A bank answers to both; a mortgage broker answers to the FCA only.
+Does the PRA regulate mortgage brokers?
No. Mortgage brokers and advisory firms are solo-regulated by the FCA, which handles both their conduct and their prudential rules. The PRA regulates the lenders that accept deposits, such as banks and building societies, for prudential purposes.
+What does FSMA 2000 do?
The Financial Services and Markets Act 2000 is the main statute for UK financial regulation. It sets the general prohibition on carrying on regulated activities without authorisation, gives the regulators their objectives and powers, and created the Financial Ombudsman Service and the FSCS. It came fully into force on 1 December 2001.
+When did mortgage advice become regulated?
Mortgage lending and advice on regulated mortgage contracts became regulated on 31 October 2004, often called M-Day, when the FSA's MCOB sourcebook took effect. Before that, lenders followed a voluntary industry code.
+What is a regulated activity?
A regulated activity is an activity listed in the Regulated Activities Order made under FSMA 2000, carried on by way of business and relating to a specified investment. Examples include entering into, advising on and arranging regulated mortgage contracts. Carrying one on without authorisation or an exemption is a criminal offence.
+What happened to the FSA?
The Financial Services Authority was the single UK regulator from 1 December 2001. The Financial Services Act 2012 abolished it on 1 April 2013, splitting its work between the new FCA, which took the conduct role, and the PRA, which took prudential supervision of the largest firms.
+What are the FCA conduct rules?
The Conduct Rules in the FCA's COCON sourcebook apply to almost everyone working in a regulated firm under SM&CR. The individual rules require integrity, due skill, care and diligence, openness with regulators, proper market conduct and acting to deliver good outcomes for retail customers. Senior managers have four extra rules.
Keep reading
- CeMAP FRE1: Industry, Regulation and Key PartiesCeMAP FRE1 mock exam guide: the 40-question format, all five learning outcomes in order, common traps and a four-week plan, with free FRE1 questions.
- CeMAP 1: The FSRE Module and Its Two Unit Exams, FRE1 and FRE2CeMAP 1 is the FSRE module: two 40-question unit exams, FRE1 and FRE2, each 1 hour, pass 28/40. Syllabus, costs, old UKFR mapping and free mocks.
- MCOB Explained: The FCA Mortgage Rules You Need for CeMAPMCOB rules for CeMAP: each MCOB chapter mapped to MRT1, MRT2 and ASEW, with the ESIS, MCOB 11.6 affordability, MCOB 13 arrears and the Consumer Duty.
- The FSCS and the Financial Ombudsman Service for CeMAP FRE2FSCS and FOS for CeMAP FRE2: complaint handling rules, the 8-week and 6-month limits, FOS award limits, FSCS cover and what happens if a lender fails.
- CeMAP FRE2: Skills, Principles and Ethical BehavioursCeMAP FRE2 mock exam guide: the 40-question format, LO6 to LO8 in official order, the Consumer Duty link, common traps and a four-week plan.