LONDON, May 14 (Reuters) - An industry body is to consult on possible changes to the way payouts on financial market insurance policies known as credit default swaps are decided.

Investors use CDS to protect themselves in case a country or company goes bust but their opaque rules that mean payouts are largely decided by the same banks and funds that buy and sell them has long-raised conflict of interest concerns.

The International Swaps and Derivatives Association (ISDA) has now launched "a market-wide consultation" on the process following an independent review by UK-based law firm Linklaters.

ISDA Chief Executive Scott O’Malia said that making the CDS process more robust and binding for all market participants was "absolutely critical".

"While the (CDS determination committees) have functioned well for 15 years, we think it’s appropriate for the industry to consider whether any changes could be made to improve the structure and governance of the process."

The CDS market is estimated to be worth around $3.8 trillion, well below the $33 trillion it was worth in its pre-financial crisis heyday, but still one of the most common ways traders hedge credit risk.

Linklaters' review had highlighted that, "one of the potential drawbacks of the existing DC (CDS determination committee) structure is that DC members will often have CDS positions and, therefore, a financial interest in the matters they are deciding".

ISDA's consultation, which will run until late July and come up with recommendations that DCs themselves would chose whether to implement, is asking for feedback on a wide range of changes.

One is whether the committees should start having up to three independent members, including one as a chairperson.

It also suggests enhancing DC members’ compliance procedures, setting up a separate governance body and making it easier for key decisions to be referred to an independent panel.

CDS market participants are also being asked whether more detailed explanations of decisions should be provided and whether they would support a small charge being added to CDS trades to fund the running of DCs and the recommended changes.

"A robust, standardized settlement process for credit default swaps that is binding on all market participants is absolutely critical for central clearing, which, in turn, significantly reduces risk in the financial system," O'Malia said. (Reporting by Marc Jones; Editing by Alison Williams)