UPDATE 2-BIS wants financial products ranked like medicines

(Adds industry reaction)

By Huw Jones

BASEL, Switzerland, June 29 (Reuters) - Financial products should undergo registration like medicines to curb investor access until safety is proven, the Bank for International Settlements said on Monday.

Policymakers were alarmed at how opaque and complex securitised products collapsed in value as the credit crunch began unfolding from mid-2007, despite being highly rated. This sparked huge writedowns by banks that shattered investor confidence.

"In a scheme analogous to the hierarchy controlling the availability of pharmaceuticals, the safest securities would, like non-prescription medicines, be available for purchase by everyone," the BIS, which acts as a forum for the world's central banks, said in its annual report.

"Next would be financial instruments available only to those with an authorisation, like prescription drugs; another level down would be securities available only in limited amounts to pre-screened individuals and institutions, like drugs in experimental trials," the BIS said.

"Finally, at the lowest level would be securities that are deemed illegal."

A new instrument would be rated or an existing one moved to a higher safety category only after successful tests.

"Such a registration and certification system creates transparency and enhances safety ... This will mean that issuers bear increased responsibility for the risk assessment of their products," the BIS said.

Access to some products is already restricted in some countries, such as to hedge funds, while the Netherlands, Greece and other states impose restrictions on how big a mortgage a consumer can have on a property.

Critics say an all-encompassing financial product classification system would stifle innovation and it should be up to customers to decide.

"Our hope is that people will take this up and evaluate whether or not it's worth pursuing," BIS chief economist, Stephen Cecchetti, told a news conference.

"There has to be some mechanism for the evaluation of suitability and riskiness of instruments, especially as they become more widely traded," Cecchetti said.

EU financial rules already require banks and brokers to ensure some clients meet a "suitability" test but attitudes are changing even among the more traditionally liberal regulators.

Britain's Financial Services Authority is mulling whether it should regulate retail and wholesale products, a shift from its past stance that a properly run firm won't offer risky products.

And the Obama administration has proposed a new consumer protection agency to regulate products but the banking industry, sensing a potential threat to profits, is fighting back hard.