Pillar 3, Stewardship Code and Remuneration Disclosure

May 2022
Palliser Capital (UK) Ltd
(“Palliser” / the “Firm”)

The Capital Requirements Directive (“CRD”) and the Alternative Investment Fund Management Directive (“AIFMD”) of the European Union establish a revised regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain.

In the United Kingdom, the CRD and AIFMD have been implemented by the Financial Conduct Authority (‘FCA’) in its regulations through the General Prudential Sourcebook (“GENPRU”), the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”), the Interim Prudential Sourcebook for Investment Business (“IPRU (INV)”).

The CRD consists of three ‘Pillars’:

• Pillar 1 sets out the minimum capital amount that meets the Firm’s credit, market and operational risk capital requirement;
• Pillar 2 requires the Firm to assess whether its capital reserves, processes, strategies and systems are adequate to meet pillar 1 requirements and further determine whether it should apply additional capital , processes, strategies or systems to cover any other risks that it may be exposed to; and
• Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position to encourage market discipline.

The AIFMD adds further capital requirements based on the Alternative Investment Fund (“AIF”) assets under management and professional liability risks.

The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This disclosure is designed to meet our Pillar 3 obligations.

The Pillar 3 disclosure document has been prepared by Palliser in accordance with the requirements of BIPRU 11 and is verified by senior management. Unless otherwise stated, all figures are as at the Dec 2021 financial year-end.

Palliser is permitted to omit required disclosures if it believes that the information is immaterial such that omission would be unlikely to change or influence the decision of a reader relying on that information for the purpose of making economic decisions about the Firm.

In addition, Palliser may omit required disclosures where it believes that the information is regarded as proprietary or confidential. In its view, proprietary information is that which, if it were shared, would undermine its competitive position. Information is considered to be confidential where there are obligations binding the Firm to confidentiality with its customers, suppliers and counterparties.

Where Palliser has chosen to omit information because it is proprietary or confidential, it has explained the omission and provided its reason.

Scope and application of the requirements

Palliser is authorised and regulated by the FCA and as such is subject to minimum regulatory capital requirements. The Firm is categorised as a Collective Portfolio Management Investment Firm (‘CPMI’) Firm’ by the FCA for capital purposes.

It is an agency investment management firm and as such has no trading book exposures.

Although part of a group, the Firm is managed on a “stand-alone” for liquidity purposes and the Firm does not foresee any impediments to the prompt transfer of capital between group entities should the need arise. There are no differences in the basis of consolidation for accounting and prudential purposes.

Risk management

The firm’s Risk Management Committee are responsible for the management of risk within the Firm and individual responsibilities are clearly defined. The Risk Management Committee report to the Firm’s governing body on a frequent basis regarding the risks. Palliser has clearly documented policies and procedures, which are designed to minimise risks to the Firm and all staff are required to confirm that they have read and understood them.

Palliser is using the ICARA process to identify and manage its key risks on an ongoing basis and ensure that it has sufficient capital in respect of such risks. The process is forward looking and will become an integral part of the management of the Firm. The Chief Operating Officer (“COO”) (who is also the Compliance Officer) is responsible for the ICARA within Palliser and consults with internal teams and external providers to ensure accuracy of findings.

The Firm’s senior management will formally review and approve the ICARA document on at least an annual basis (or more frequently if there are material changes to the Firm’s business model and risk exposures). The senior management, as part of its review of the ICARA, sets the Firm’s risk appetite, confirms that the Firm’s key material risks have been considered and assessed, and validates any stress testing scenarios.

Following the completion of the ICARA capital requirements calculations, the Firm has concluded that its Tier 1 capital is sufficient to cover its Pillar 1 and Pillar 2 requirements.

Regulatory capital

The Firm is a Limited Liability Company and its capital arrangements are established in its Articles. Its capital is summarised as follows:

The main features of Palliser’s capital resources for regulatory purposes are as follows:

*No hybrid tier one capital is held

The Firm is small with a simple operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency, and credit risk from management and performance fees receivable from the funds under its management.

As discussed above, Palliser is a CPMI firm and as such, its capital requirements are the higher of:

• €125,000 + 0.02% of AIF AUM > €250m; and
• The sum of the market & credit risk requirements; and
• The fixed overheads requirement (“FOR”) which is essentially 25% of the Firm’s operating expenses less certain variable costs.

0.02% is taken on the absolute value of all assets of all funds managed by Palliser (for which it is the appointed AIFM) in excess of €250m, including assets acquired through the use of leverage, whereby derivative instruments shall be valued at their market value, including funds where the Firm has delegated the management function but excluding funds that it is managing as a delegate. The FOR is calculated, in accordance with FCA rules, based on the Firm’s previous years audited expenditure.

It is Palliser’s experience that the Fixed Overhead Requirement establishes its capital requirements.

Capital requirement

Palliser’s Pillar 1 capital requirement has been determined by reference to the Firm’s Fixed Overheads Requirement (“FOR”) and calculated in accordance with Article 95. The requirement is based on the FOR since this exceeds the total of the credit and market risk capital requirements it faces and also exceeds its base capital requirement of €50,000.

The FOR is based on annual expenses net of variable costs deducted. The Firm monitors its expenditure on a monthly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year.

This is monitored by the Chief Operating Officer and reported to senior management on a monthly basis.

UK Financial Reporting Council’s Stewardship Code [for Firms managing investments]

FCA COBS Rule 2.2.3R requires FCA authorised firms to disclose whether they conform to the requirements of the UK Financial Reporting Council’s Stewardship Code (the ‘Code’). Adherence to the Code is voluntary. The Firm considers that it has an investment strategy that is not commensurate with outcomes sought thereunder. Therefore, while Palliser supports the principles of the Code, it does not consider it appropriate to conform to the Code at this time.

If the Firm investment strategy changes in such a manner that the provisions of the Code become relevant, Palliser will amend this disclosure accordingly.

Remuneration disclosure

Palliser is authorised and regulated by the Financial Conduct Authority as a CPMI and so is subject to FCA Rules on remuneration. These are contained in the FCA's Remuneration Codes located in the SYSC Sourcebook of the FCA’s Handbook.

CPMI Firms are required make a remuneration disclosure in respect of the whole of their business, i.e. MIFID and AIFMD. The specific requirements of the AIFMD remuneration disclosure are set out in the Annual Report of the AIF(s).

The Remuneration Code (‘the RemCode’) cover(s) an individual’s total remuneration, fixed and variable. The Firm incentivises staff through a combination of the two.

Palliser’s policy is designed to ensure that it complies with the FCA’s Remuneration Code as set out in Article 14 of the Alternative Investment Fund Managers Directive (“AIFMD”) and SYSC 19B of the FCA Handbook and its compensation arrangements:

1. Are consistent with and promotes sound and effective risk management;
2. Do not encourage excessive risk taking/risk-taking which is inconsistent with the risk profiles or instruments of incorporation of the AIFs they manage;
3. Include measures to avoid conflicts of interest;
4. Are in line with the Firm's business strategy, objectives, values and long-term interests.

Proportionality

Enshrined in the European remuneration provisions is the principle of proportionality. The FCA has sought to apply proportionality in the first instance by instituting two tests. Firstly, a firm that is significant in terms of its size must disclose quantitative information referred to in BIPRU 11.5.18R at the level of senior personnel. Secondly, that a firm must make disclosure that is appropriate to the size, internal organisation and the nature, scope and complexity of their activities.

Palliser is not ‘significant’ [that is to say has relevant total assets <£50bn*] and so makes this disclosure in accordance with the second test (BIPRU 11.5.20R(2)).

* average total assets on the last three accounting dates.

Application of the requirements

The Firm is required to disclose certain information on at least an annual basis regarding its Remuneration Policy and practices for those staff whose professional activities have a material impact on the risk profile of the Firm. Palliser’s disclosure is made in accordance with its size, internal organisation and the nature, scope and complexity of its activities.

1. Summary of information on the decision-making process used for determining the Firm’s Remuneration Policy including use of external benchmarking consultants where relevant.

   • Due to the size, nature and complexity of the Firm, Palliser is not required to appoint an independent remuneration committee.
   • The Firm’s policy will be reviewed as part of its annual process and procedures, or following a significant change to the business requiring an update to its internal capital adequacy assessment.
   • Palliser’s ability to pay bonus is based on the performance of the Firm overall and derived after its fund’s managed returns have been calculated by client appointed third party administrators.

2. Summary of how the Firm links between pay and performance.

   • Individuals are rewarded based on their contribution to the overall strategy of the business.

     1. Investment Generation
     2. Investment Trading
     3. Sales & Marketing
     4. Operations.
   • Other factors such as performance, reliability, effectiveness of controls, business development and contribution to the business are taken into account when assessing the performance of the senior staff responsible for the infrastructure of the Firm.

3. Quantitative information on remuneration.

   Key Management Personnel compensation for the period to Dec 31st 2021 was £226,267

The Firm may omit required disclosures where it believes that the information could be regarded as prejudicial to the UK or other national transposition of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data.

The Firm has made no omissions on the grounds of data protection.