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FRE1: 50 practice questions

Mock format: 40 questions, 60 minutes, pass 28/40 (70%). Answer key on the last page. From cemapexam.co.uk · independent study aid, not an official test. Contains public sector information licensed under the Open Government Licence v3.0. FCA Handbook material is quoted for reference and remains © Financial Conduct Authority.

  1. 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?

    1. A. Layering
    2. B. Placement
    3. C. Integration
    4. D. Structuring

  2. 2. Under an interest in possession trust, what is the income beneficiary entitled to?

    1. A. To take the trust capital whenever she chooses
    2. B. To whatever income the trustees decide to pay
    3. C. To nothing until the trust ends
    4. D. To all trust income as it arises, less expenses

  3. 3. Which section of FSMA gives the FCA its general power to make the rules found in its Handbook?

    1. A. Section 19
    2. B. Section 137A
    3. C. Section 166
    4. D. Section 56

  4. 4. Why does a 90-day notice savings account usually pay a higher rate than an instant-access account from the same provider?

    1. A. It is covered by a higher FSCS limit
    2. B. Its interest is always tax-free
    3. C. The saver gives up immediate access to the money
    4. D. Its capital can grow with the stock market

  5. 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?

    1. A. At 16
    2. B. When the trustees decide
    3. C. At 18
    4. D. At 25

  6. 6. Under COBS 3, into which three categories are clients classified?

    1. A. Retail client, professional client, eligible counterparty
    2. B. Private client, business client, corporate client
    3. C. Consumer, small business, wholesale customer
    4. D. Basic client, advised client, discretionary client

  7. 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?

    1. A. Nothing, as EPAs became invalid in 2007
    2. B. Apply to the Court of Protection to be made her deputy
    3. C. Apply to register the EPA with the Office of the Public Guardian
    4. D. Ask her to sign a new LPA to replace it

  8. 8. What does private medical insurance pay for?

    1. A. A replacement income during illness
    2. B. A lump sum on diagnosis of a serious illness
    3. C. The cost of private treatment for eligible conditions
    4. D. Long-term residential care fees

  9. 9. What is the main aim of a liquidity requirement for a firm?

    1. A. To ensure it makes a profit each year
    2. B. To ensure its staff are competent
    3. C. To ensure its advice is suitable for customers
    4. D. To ensure it can meet its obligations as they fall due

  10. 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?

    1. A. Unit of account
    2. B. Standard of deferred payment
    3. C. Medium of exchange
    4. D. Store of value

  11. 11. How is the FCA mainly funded?

    1. A. Keeping the fines it imposes on firms
    2. B. An annual grant from HM Treasury
    3. C. Fees and levies paid by the firms it regulates
    4. D. A share of the Bank of England's profits

  12. 12. Sara is a director of a limited company. She keeps trading for months after it should have been clear that insolvent liquidation could not be avoided. On liquidation, what is her main personal risk?

    1. A. A court order to contribute to the company's assets
    2. B. None, because a company's debts are never a director's
    3. C. Automatic liability for every unpaid company debt
    4. D. Losing only the value of her own shareholding

  13. 13. Under the MPC's remit, what must happen if CPI inflation moves more than one percentage point either side of the target?

    1. A. Bank Rate rises automatically by 0.25%
    2. B. The PRA reviews all bank capital levels
    3. C. The Governor writes an open letter to the Chancellor
    4. D. Parliament votes on a new inflation target

  14. 14. After several transfers, laundered funds are used to buy a business whose profits then appear to be normal trading income. Which stage of money laundering is this?

    1. A. Smurfing
    2. B. Layering
    3. C. Integration
    4. D. Placement

  15. 15. Kenny and Lou own a house as beneficial joint tenants. Kenny is made bankrupt. What happens to his interest in the house?

    1. A. It is cancelled and Lou becomes sole owner
    2. B. His share vests in the trustee in bankruptcy
    3. C. It passes to Lou by survivorship
    4. D. It stays with Kenny until he is discharged

  16. 16. In a contested FCA disciplinary case, in what order are the statutory notices normally issued?

    1. A. Decision notice, warning notice, final notice
    2. B. Final notice, warning notice, decision notice
    3. C. Warning notice, final notice, decision notice
    4. D. Warning notice, decision notice, final notice

  17. 17. Pinewood Ltd runs a defined benefit occupational pension scheme for its staff. Which regulator oversees the scheme's governance and funding?

    1. A. The Financial Conduct Authority
    2. B. The Pensions Regulator
    3. C. The Prudential Regulation Authority
    4. D. The Payment Systems Regulator

  18. 18. Since FSMA 2023, both the FCA and the PRA have a secondary objective relating to which matter?

    1. A. The promotion of financial inclusion for all households
    2. B. The protection of jobs in financial services
    3. C. The reduction of public sector borrowing
    4. D. The UK economy's international competitiveness and growth

  19. 19. Sana's net pay is £2,600 a month. Her essential outgoings are £1,500 a month and her discretionary spending is £600. Using a three-month guideline, how large should her emergency fund be?

    1. A. £6,300
    2. B. £4,500
    3. C. £7,800
    4. D. £1,500

  20. 20. In a defined contribution pension scheme, who mainly bears the investment risk?

    1. A. The member
    2. B. The scheme trustees
    3. C. The employer
    4. D. The government

  21. 21. Vera has capacity and decides to spend £15,000 of her savings on a world cruise. Her attorney under a property and financial affairs LPA thinks this is foolish. What is the correct approach?

    1. A. Approve half the amount as a compromise
    2. B. Ask the bank to freeze the account
    3. C. Block the payment as it is not in her best interests
    4. D. Respect her decision, as she has capacity

  22. 22. Principle 12, which took effect on 31 July 2023, requires a firm to do what?

    1. A. Make sure each adviser completes 12 hours of CPD
    2. B. Treat every customer fairly in all its dealings
    3. C. Act to deliver good outcomes for retail customers
    4. D. Hold capital worth 12% of its annual income

  23. 23. A firm disagrees with an FCA decision notice imposing a financial penalty. To which body can it refer the matter for a full rehearing?

    1. A. The Upper Tribunal
    2. B. The Competition Appeal Tribunal
    3. C. The Pensions Ombudsman
    4. D. The Financial Ombudsman Service

  24. 24. A client in Scotland wants a formal, legally binding arrangement with creditors similar to an English IVA. What is the Scottish equivalent?

    1. A. A bankruptcy restrictions undertaking
    2. B. An administration order
    3. C. A debt relief order
    4. D. A protected trust deed

  25. 25. Bella dies intestate in England, survived by her husband and two children. Her estate, excluding chattels, is £722,000. How much does each child receive?

    1. A. £200,000
    2. B. £100,000
    3. C. £180,500
    4. D. £133,333

  26. 26. Why is whole of life assurance often used to help pay an expected inheritance tax bill?

    1. A. It ends automatically at the State Pension age
    2. B. It pays only if the policyholder dies within seven years
    3. C. Its premiums are the cheapest of any life policy
    4. D. It pays out whenever death occurs, provided premiums are paid

  27. 27. Why is the knowledge gap between financial firms and retail consumers a key reason for regulating financial advice?

    1. A. Consumers may be unable to judge whether advice is suitable
    2. B. It means consumers always pay more tax
    3. C. It stops firms from competing on price
    4. D. Firms cannot price products without regulation

  28. 28. Over several years of rising prices, £1,000 kept in a drawer buys noticeably fewer goods than it did. Which function of money has been weakened most?

    1. A. Unit of account
    2. B. Standard of measurement for wages
    3. C. Medium of exchange
    4. D. Store of value

  29. 29. Banks supervised by the PRA must carry out their own assessment of the capital they need for their risks. What is this assessment called?

    1. A. The KFI
    2. B. The ESIS
    3. C. The ICAAP
    4. D. The RMAR

  30. 30. Raj's will leaves his estate to his wife Sita and names her executor. They divorce, but Raj does not update his will before he dies. What is the effect?

    1. A. The whole will is revoked by the divorce
    2. B. The will stands, but gifts to Sita pass as if she had died
    3. C. Sita inherits half and Raj's children the rest
    4. D. Sita still inherits, as the will was valid when made

  31. 31. An employer fails to enrol eligible jobholders into a workplace pension as the law requires. Which body enforces these automatic enrolment duties?

    1. A. HM Revenue and Customs
    2. B. The Financial Conduct Authority
    3. C. The Information Commissioner's Office
    4. D. The Pensions Regulator

  32. 32. A firm complies with an evidential provision ('E') attached to a rule. What is the effect for that rule?

    1. A. It tends to show the firm complied with the rule
    2. B. It has no bearing on whether the rule is breached
    3. C. It guarantees the firm cannot breach the rule
    4. D. It gives the firm a defence to criminal charges

  33. 33. A bank takes in instant-access deposits from savers and uses them to fund 25-year mortgages. Which function of financial intermediation does this describe?

    1. A. Aggregation
    2. B. Risk transformation
    3. C. Maturity transformation
    4. D. Disintermediation

  34. 34. What does TC guidance say about the level of supervision an employee needs before being assessed as competent?

    1. A. It can be the same as after assessment
    2. B. It must be carried out by FCA staff
    3. C. It should be significantly greater than after assessment
    4. D. None is needed once the regulatory module is passed

  35. 35. How does a partnership formed in Scotland differ in law from an ordinary partnership formed in England?

    1. A. Scottish partners have no personal liability for firm debts
    2. B. A Scottish partnership must register at Companies House
    3. C. The Scottish firm is a legal person distinct from its partners
    4. D. A Scottish partnership cannot own any property

  36. 36. MIFIDPRU, introduced by the FCA in January 2022, sets prudential requirements for which firms?

    1. A. FCA-authorised investment firms
    2. B. General insurers
    3. C. Mortgage-only intermediaries
    4. D. PRA-regulated banks

  37. 37. Ewan and Fran own a house as joint tenants. They separate, and Ewan wants to leave his share to his children by will. Fran will not cooperate. What can Ewan do?

    1. A. Apply to court for a divorce order first
    2. B. Nothing, as both must agree to any change
    3. C. Serve a written notice of severance on Fran
    4. D. Ask the lender to change the mortgage

  38. 38. Zack's will leaves everything to his sister. Which of his assets will pass under his will when he dies?

    1. A. A life policy written in trust for his children
    2. B. His home, owned with his wife as joint tenants
    3. C. A trust fund in which he had a life interest
    4. D. A savings account in his sole name

  39. 39. What is the main aim of the FCA's Client Assets sourcebook (CASS)?

    1. A. To decide which clients a firm may accept
    2. B. To set the capital a firm must hold against its own risks
    3. C. To govern how firms handle customer complaints
    4. D. To protect client money and assets, especially if a firm fails

  40. 40. Why does MIPRU require mortgage intermediaries to hold professional indemnity insurance?

    1. A. To protect lenders if the borrower defaults
    2. B. To replace FSCS protection for the firm's clients
    3. C. To cover claims against the firm, such as for negligent advice
    4. D. To insure the customer's property against damage

  41. 41. Neil, 45, has no private pension and expects to rely on his State Pension. What is the main risk of him delaying private pension saving?

    1. A. Having to repay tax relief already claimed
    2. B. Losing his State Pension entitlement
    3. C. Paying more income tax this year
    4. D. Having too little income to live on in retirement

  42. 42. Under the Partnership Act 1890, what is needed for a partnership to exist?

    1. A. At least three partners sharing profits equally
    2. B. A written partnership deed registered with HMRC
    3. C. Registration of the firm at Companies House
    4. D. Persons running a business together for profit

  43. 43. Which statement best describes how the FCA and PRA must work together under FSMA?

    1. A. They act independently with no duty to cooperate
    2. B. The PRA can overrule any FCA conduct rule it dislikes
    3. C. They have a statutory duty to coordinate and must keep an MoU
    4. D. The FCA may supervise PRA firms only with PRA approval

  44. 44. A gilt with a 2% coupon trades at £90 per £100 nominal, with five years to redemption. How will its gross redemption yield compare with its running yield?

    1. A. Higher, because it includes the gain to par at redemption
    2. B. Lower, because the coupon is below the market yield
    3. C. Lower, because the price must fall to par
    4. D. The same, because the coupon is fixed

  45. 45. Northshire Building Society accepts retail deposits and offers mortgages. How is it regulated?

    1. A. Solo-regulated by the FCA for all purposes
    2. B. Regulated by the PRA for prudential and conduct
    3. C. Supervised by the FPC with FCA conduct oversight
    4. D. Dual-regulated: PRA for prudential, FCA for conduct

  46. 46. An insurance broker collects premiums from customers before passing them to insurers. Which CASS chapter governs the client money it holds?

    1. A. CASS 7
    2. B. CASS 5
    3. C. CASS 10
    4. D. CASS 6

  47. 47. A client's employer phones her adviser and asks for details of her mortgage application. What should the adviser do?

    1. A. Refer the employer to the lender for the details
    2. B. Decline to share anything without the client's consent
    3. C. Give a summary but leave out the loan amount
    4. D. Give the details, as employers often confirm income

  48. 48. Which of these is a recognised impact of financial crime on the UK financial services industry?

    1. A. Higher returns for honest investors
    2. B. Lower compliance costs for firms
    3. C. Less need for regulation
    4. D. Loss of confidence in firms and markets

  49. 49. The FCA wants an independent expert to examine weaknesses in a firm's mortgage advice processes and report back. Which power allows this?

    1. A. A restitution order under s384
    2. B. A public censure under s205
    3. C. A skilled person's report under s166
    4. D. A prohibition order under s56

  50. 50. How does a person apply for a debt relief order in England and Wales?

    1. A. Through the Financial Conduct Authority
    2. B. Through their largest creditor
    3. C. Directly to the county court, paying a fee
    4. D. Through an approved debt adviser, at no charge

Answer key

  1. 1. A — 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. 2. D — 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. 3. B — 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. 4. C — 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. 5. C — 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. 6. A — 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. 7. C — 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. 8. C — 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. 9. D — 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. 10. C — 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.
  11. 11. C — The FCA is funded mainly by fees charged to regulated firms, set out in the FEES sourcebook. Financial penalties, after deducting certain enforcement costs, are paid to HM Treasury rather than funding the FCA's general budget.
  12. 12. A — Directors are normally shielded by the company's separate personality. Under the Insolvency Act 1986 s214 (wrongful trading), a court can order a director to contribute to the company's assets if she knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation and did not take every step to minimise creditors' losses.
  13. 13. C — The remit requires the Governor to write an open letter to the Chancellor if inflation is more than one percentage point above or below the 2% target. The letter explains why, what the MPC plans to do and how long inflation is expected to take to return to target. This supports accountability for an independent central bank.
  14. 14. C — Integration is the final stage, when laundered funds re-enter the legitimate economy, for example through business or property purchases, so that the criminal can use them openly. The money now appears to have a legitimate source. Earlier stages are placement and layering.
  15. 15. B — When a co-owner is made bankrupt, his share of jointly owned property passes to the trustee in bankruptcy after secured debts. This severs the joint tenancy, so Lou does not take Kenny's share by survivorship.
  16. 16. D — The FCA first gives a warning notice setting out the proposed action, and the person can make representations. It then issues a decision notice. Once the matter is concluded, including any Tribunal reference, it issues a final notice, which is usually published.
  17. 17. B — The Pensions Regulator (TPR), created by the Pensions Act 2004, regulates work-based pension schemes. This includes the governance and funding of occupational defined benefit schemes and the conduct of their trustees.
  18. 18. D — FSMA 2023 gave the FCA (s1EB) and the PRA a secondary objective to facilitate the international competitiveness of the UK economy and its growth in the medium to long term. A secondary objective is subject to the regulators' primary objectives.
  19. 19. B — The emergency fund guideline is based on essential outgoings, not income or total spending. Three months x £1,500 = £4,500. Discretionary spending can be cut in an emergency, so it is left out.
  20. 20. A — In a defined contribution scheme, the pension depends on contributions, investment growth and charges, so the member bears the risk that the fund performs poorly. In a defined benefit scheme, by contrast, the employer must fund a promised income based on salary and service. MoneyHelper explains the difference.
  21. 21. D — Section 1(4) of the Mental Capacity Act 2005 says a person is not to be treated as unable to make a decision merely because it is unwise. Vera has capacity, so the decision is hers.
  22. 22. C — Principle 12 (the Consumer Duty) requires a firm to act to deliver good outcomes for retail customers. PRIN 2A sets out the detailed rules. Where Principle 12 applies, it sets a higher standard than Principles 6 and 7.
  23. 23. A — A person who receives a decision notice may refer the matter to the Upper Tribunal (Tax and Chancery Chamber). The Tribunal considers the case afresh and can decide what action, if any, is appropriate.
  24. 24. D — In Scotland a protected trust deed, governed by the Bankruptcy (Scotland) Act 2016, is the voluntary arrangement closest to an IVA. Scottish bankruptcy is known as sequestration and is overseen by the Accountant in Bankruptcy.
  25. 25. B — The husband takes £322,000, leaving £400,000. He takes half (£200,000) and the other half (£200,000) is held on the statutory trusts for the children, giving £100,000 each.
  26. 26. D — Whole of life assurance pays out whenever the life assured dies, provided premiums are kept up, so the money will be there whenever the inheritance tax falls due. Written in trust, the payout can be kept outside the estate. MoneyHelper notes it costs more than term cover.
  27. 27. A — Financial products are complex and their outcomes often appear years later, so many consumers cannot tell good advice from bad at the time they buy. This information asymmetry is why regulators require firms to act with integrity, skill, care and diligence and to give suitable advice. The FCA's Principles for Businesses (PRIN 2.1.1R) set these high-level standards.
  28. 28. D — Money is a store of value when it keeps its purchasing power over time. Inflation erodes that purchasing power, so the same £1,000 buys less. The note can still be used to pay for things, so its role as a medium of exchange is intact.
  29. 29. C — The Internal Capital Adequacy Assessment Process (ICAAP) is a firm's own assessment of the amount and type of capital it needs for its risks. The PRA reviews it in setting the firm's capital requirements.
  30. 30. B — Under the Wills Act 1837 s18A, divorce does not revoke the will, but gifts to and appointments of the former spouse take effect as if she had died on the date of the divorce. The estate passes under the rest of the will or, if needed, intestacy.
  31. 31. D — The Pensions Act 2008 places automatic enrolment duties on employers, and TPR enforces them. It can issue compliance notices and fixed and escalating penalties.
  32. 32. A — Compliance with an evidential provision may be relied on as tending to establish compliance with the related rule. Contravening it may be relied on as tending to establish a breach. It is rebuttable evidence, not a guarantee.
  33. 33. C — Maturity transformation means borrowing short-term (deposits that can be withdrawn at any time) and lending long-term (mortgages repaid over decades). Banks make this possible because not all savers withdraw at once. It is one of the main ways intermediaries connect savers and borrowers.
  34. 34. C — TC 2.1.3G states that the level of supervision should be significantly greater before the employee is assessed as competent than after. TC 2.1.2R requires appropriate supervision at all times.
  35. 35. C — Section 4(2) of the Partnership Act 1890 provides that in Scotland a firm is a legal person distinct from the partners. Partners remain liable for the firm's debts, but the firm itself can, for example, be a party to contracts.
  36. 36. A — MIFIDPRU is the FCA's prudential sourcebook for MiFID investment firms under the Investment Firms Prudential Regime. It was enabled by the Financial Services Act 2021 and took effect on 1 January 2022.
  37. 37. C — A joint tenant can sever the joint tenancy without the other owner's agreement by serving written notice of severance (Law of Property Act 1925 s36(2)). Ewan can then apply to HM Land Registry for a Form A restriction, and the parties become tenants in common.
  38. 38. D — Only assets that form part of Zack's own estate pass under his will. A sole-name savings account does. Joint tenancy property passes by survivorship, and assets held in trust are owned by the trustees and pass under the trust terms.
  39. 39. D — CASS sets rules for how firms hold and protect client money and custody assets. If a firm fails, clients' money and assets can then be identified and returned quickly. It puts detail on Principle 10.
  40. 40. C — MIPRU 3 requires intermediaries to hold PII so that they can meet claims arising from their professional liability, such as negligent advice. This protects customers and supports the firm's financial resilience.
  41. 41. D — The State Pension provides only a basic income, so someone with no private provision may face a large shortfall in retirement. The longer saving is delayed, the less time contributions have to grow. MoneyHelper explains how workplace and personal pensions add to the State Pension.
  42. 42. D — Section 1 of the Partnership Act 1890 defines partnership as the relation between persons carrying on a business in common with a view of profit. No written agreement or registration is needed, so a partnership can arise from conduct alone.
  43. 43. C — FSMA s3D requires the FCA and PRA to coordinate their functions, and s3E requires them to prepare and maintain a memorandum of understanding. The PRA has only a limited power to direct the FCA, for example where action could threaten financial stability.
  44. 44. A — The running yield counts only the coupon income: £2 / £90 = about 2.2%. The redemption yield also includes the capital gain from buying at £90 and receiving £100 at redemption, so it is higher. When a gilt is priced below par, its redemption yield is above its running yield.
  45. 45. D — Deposit-takers, including banks and building societies, are PRA-authorised persons. The PRA supervises their safety and soundness, while the FCA regulates their conduct. This is known as dual regulation.
  46. 46. B — CASS 5 covers client money held in connection with insurance distribution activity. CASS 7 is the general client money chapter for investment business, CASS 6 covers custody and CASS 10 the resolution pack.
  47. 47. B — Client information must be kept confidential, and UK GDPR requires personal data to be processed lawfully, fairly and only for specified purposes. Passing details of an application to the client's employer without consent would breach these principles. The adviser should decline and may tell the client about the call.
  48. 48. D — Financial crime damages trust in firms and markets, funds further criminal activity and raises costs for firms, which must invest in controls. The FCA treats reducing financial crime as part of its objective of protecting the integrity of the UK financial system. Its effects are harmful, not beneficial.
  49. 49. C — FSMA s166 allows the regulator to require a report by a skilled person, or to appoint one itself, on matters it specifies. The firm usually pays for the report. SUP 5 explains how the power is used.
  50. 50. D — A DRO application must be made through an approved debt adviser (intermediary); the debtor cannot apply alone. There is no fee, and the DRO normally lasts 12 months, after which the included debts are written off.

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