7.21. Financial services cover financial intermediary and auxiliary services conducted between residents and non-residents. Included are intermediary service fees, such as those associated with letters of credit, bankers’ acceptances, lines of credit, financial leasing and foreign exchange transactions (for the latter, the spread between the mid point rate and the buying/selling rate is regarded as the service charge); commissions and other fees related to transactions in securities; commissions of commodity futures traders; services related to asset management, financial market operational and regulatory services and security custody fees.
7.22. Financial services also include Financial Intermediation Services Indirectly Measured (FISIM) which estimates the value of the services provided by financial intermediaries for which no explicit charges are made. The broad concept is that, whenever financial intermediaries take deposits or make loans, a service is being provided, and that interest rates on deposits and loans include an implicit service element. The interest rates paid by intermediaries on deposits are less than a notional pure rate of interest because the intermediaries first deduct an amount required (the service fee) to cover the deposit security, branch network costs and the costs of participation in payments mechanisms. Similarly, the interest rate charged by intermediaries on loans includes not only the notional pure interest rate, but a surcharge for the services embodied in making and administering the loans. The imputed service charge on deposits and loans is included in financial services and an equivalent and offsetting adjustment is made to investment income. While both services and income flows are affected by the inclusion of FISIM, the net effect on the current account is zero. (There are practical difficulties in measuring FISIM. The notional pure rates of interest are not observable and must be approximated. FISIM is calculated using a ‘reference rate approach’ to disaggregate the interest flows into a service element and a ‘pure’ interest element. The margins between the reference rates and deposit and loan rates are applied to the observed effective rates being paid on cross-border deposits and loans. Australia’s cross-border FISIM flows are small, with much of Australia’s cross-border investment being made in securities or through direct investment where no FISIM is applicable.)