Inflection Point Investments LLP
Pillar 3 Disclosure Statement
Inflection Point Investments LLP ("Inflection Point" or "the Company") is authorised and regulated by the UK Financial Conduct Authority ("FCA") as a Collective Portfolio Management Investment (“CPMI”). This means it is subject to the capital rules for MiFID firms as set out in BIPRU and the capital rules for alternative investment fund managers as set on in IPRU-INV and has to meet the requirements of both regimes. As a BIPRU firm Inflection Point is subject to rules set out in the third European Capital Adequacy Directive ("CRD III") and is not required to follow the rules of the fourth European Capital Adequacy Directive ("CRD IV").
The FCA capital adequacy framework consists of three Pillars:
Pillar 1 sets out the minimum capital amount that meets the Firm's credit, market and operational risk;
Pillar 2 requires the Firm to assess whether its Pillar 1 capital is adequate to meet its risks and is subject to annual review by the FCA (the ICAAP as set out below); and
Pillar 3 requires disclosure of specified information about the underlying risk management controls, capital position and remuneration. This document is Arion's Pillar 3 disclosure statement.
As required by the rules of the FCA the Company has undertaken an 'Internal Capital Adequacy Assessment Process' ("ICAAP"). The ICAAP is reviewed annually or whenever there is a material change to the business, whichever is sooner. The most recent ICAAP review was undertaken as at 31st May 2021. The ICAAP process considered the risks that the Company is exposed to and the controls that exist to mitigate those risks. It further considered whether additional capital was required to meet the risks that the Company faces including, as required by the FCA rules, the potential cost of closing the Company down in the unlikely event that such action was necessary.
Under BIPRU the Company's Pillar 1 capital requirement is the higher of the base capital requirement of EUR 50,000, the sum of the credit risk and market risk requirements and the fixed overhead requirement. Under IPRU-INV the Company is subject to a own funds requirement that is the higher of the funds under management requirement, €125,000 and the fixed overheads requirement plus, in all cases the PII capital requirement. Under IPRU-INV the Company is also subject to a liquid capital requirement.
The calculated fixed overhead requirement for 2021 is £42,000 which is less than the alternative capital requirement of £129,000. Therefore, the IPRU-INV capital requirement is higher and is Inflection Point required capital. The Company had a surplus of £21,000 of its IPRU-INV capital requirement.
All activities of the firm are under the control of the four members, who ensure that there are effective systems and controls in place to identify, monitor and manage risks arising in the business. Management accounts demonstrating the adequacy of the firm’s regulatory capital are prepared on a monthly basis.
Appropriate action is taken where risks are identified which fall outside of the firm’s risk tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the firm’s mitigating controls.
The Company is an asset manager and does not risk its own capital in the financial markets. The Company does not have regulatory permission to take proprietary trading risk and does not take such risk. Accordingly, the risks that the Company faces are more limited in scope than for other types of regulated firms. The risks and controls detailed below are, in accordance with the BIPRU rules, risks that the Company faces in respect of its own activities. The risk management processes and controls for monies managed by the Company are not part of these disclosures.
All of the capital of the company is Tier 1 capital. As at 31 May 2021 the Company had Tier 1 capital of £150,000.
Principal risks and uncertainties
The Company has identified and performed an assessment of the key risks that may impact its business. The Company is an investment manager and does not undertake proprietary trading. The material risks to the Company largely fall within the "Business Risk" and "Operational Risk" categories.
For the purposes of these disclosures, market risk is the risk value of, or income arising from, the Company's assets and liabilities varying as a result of changes in the market price of financial assets, changes in exchange rates or changes in interest rates.
The Company does not take proprietary trading risk. The Company's risk management activities are on behalf of clients and the Company's own money is not at risk. The only market risks that the Company potentially faces are: risks related to the short term investment of surplus cash belonging to the Company and currency risk due to the mismatch of the currencies in which income is earned and the currencies in which costs are incurred.
For capital adequacy purposes, in accordance with the rules, the Company monitors its current exposure due to amounts held and receivable in currencies other than sterling. The directors consider potential future exposures as part of their overall risk monitoring.
The firm is exposed to credit risk in respect of investment management fees billed and cash held on deposit.
The number of credit exposures relating to the firm’s investment management clients is limited. Management fees are accrued monthly and payable quarterly from the fund managed and performance fees are drawn every year end where applicable. The firm considers that there is little risk of default by its clients. All bank accounts are held with large international credit institutions and the firm monitors its exposure to those institutions on an ongoing basis.
Given the nature of the firm’s exposures, no specific policy for hedging and mitigating credit risk is in place. The firm uses the simplified standardised approach detailed in BIPRU 3.5.5 of the FCA Handbook when calculating risk weighted exposures in respect of its debtors. This amounts to 8% of the total assets on the balance sheet other than bank balances which are subject to a risk weighted exposure of 1.6% in accordance with BIPRU 2.4 of the FCA handbook.
The Company's liquidity policy is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in fees received/receivable. The Company maintains cash balances at its bankers to cover liquidity risk.
Operational risk is the risk of loss arising from failed or inadequate internal processes or systems, human error or other factors. The risk is managed by the directors who have responsibility for putting in place appropriate controls for the business. The Company documents the risks that it is exposed to and the compensating controls in its ICAAP.
Business risk is the risk that the Company may not be able to carry out its business plan and could therefore suffer losses if its income falls. This is a risk that all businesses face. The directors continuously monitor income and expenditure levels and adjust their plans accordingly.
Concentration risk is the risk that the Company is overly dependent upon any one customer or any one group of connected customers either in terms of income dependency or in terms of credit risk. Currently the only such exposure is to the Company's bankers.
Pension obligation risk
The Company has no defined benefit schemes and thus has no pension obligation risk.
Interest rate risk
The Company is not exposed to interest rate risk.
Residual risk is any risk not covered by the specific risk categories outlined above.
The directors do not consider that there are any residual risks that require the Company to maintain any additional capital.
Under the Remuneration Code (the “Remuneration Code”), the firm, as is standard for an investment management firm, is classified as a Proportionality Level three firm. Proportionality Level three firms are permitted to disapply many of the technical requirements of the Remuneration Code and proportionately apply the Remuneration Code’s rules and principles in establishing the firm’s policy.
As at 31 May 2021 the firm had 4 Code Staff all of whom were in a “significant influence function” as they are all partners in the firm. The firm currently has no risk takers who do not also occupy a “significant influence function”. The firm has only one business area which is its investment management business.
The link between pay and performance
Inflection Point sets the variable remuneration of its Code Staff primarily based on the performance of the FIRM however adjustments may be made depending on the performance of the individual. This policy is consistent with the way in which the firm generates its income.
Quantitative remuneration data
We are required to disclose the following quantitative data:
BIPRU 11.5.18R(6) (aggregate quantitative information on remuneration, broken down by business area)
BIPRU 11.5.18R(7) (aggregate quantitative information, broken down by senior management and members of staff whose actions have material impact on the risk of the firm).
The firm has only one business area. All Code Staff are deemed to be members of senior management and the total amounts allocated as remuneration to Code Staff amounted to £400,000.