Britain's top financial regulator will deliver a stinging attack on the banks that rigged the Libor interest rate and the trade body that oversees it on Friday and lay out a 10-point plan to repair the discredited benchmark rather than replace it.
Martin Wheatley, managing director of the Financial Services Authority (FSA), will press the "reset button" to restore the integrity of the interest rate that Barclays was fined a record 290 million pounds ($470 million) in June for manipulating.
"The system is broken and needs a complete overhaul," Wheatley says in a speech made available in advance.
"The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust -- it has torn the very fabric that our financial system is built on."
Royal Bank of Scotland is expected to be next to settle Libor charges, with other banks to follow.
Wheatley's review marks the first step towards overhauling the system of setting rates which are used as a benchmark for pricing trillions of dollars worth of financial products ranging from complex derivatives to simple home loans.
Confidence in the way Libor is set has been undermined by the fixing scandal that involves some of the world's biggest banks and traders in London, New York and Singapore.
Users of Libor -- the London interbank offered rate -- will breathe a sigh of relief that Wheatley has decided on no alternative rate and has instead opted for "comprehensive" reform of the existing benchmark.
Asset management firms say they feared a rapid move to a new rate risked disrupting millions of contracts for credit cards and home and business loans that stretch out many years.
Libor is a suite of 150 benchmarks covering many currencies and maturities, compiled from a panel of banks who quote a rate at which they believe they could borrow from one another.
It is used in financial transactions worth at least $300 trillion globally and will in future be directly regulated by the FSA.
Governance and oversight will be stripped from a "careless" British Bankers' Association and handed to an independent body that will be selected by open tender.
"The British Bankers' Association clearly failed to properly oversee the Libor setting process and should take no further role in the administration and governance of Libor," Wheatley says.
The BBA said it worked closely with Wheatley on his review and it has strongly stated the need for greater regulatory oversight of Libor and tougher sanctions for manipulation.
"The absolute priority now for everyone is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators, and we will work closely with the government and regulatory bodies to ensure this," the BBA said.
The tender will be run by an independent committee headed by Baroness Hogg, who chairs the Financial Reporting Council, the independent British corporate governance regulator.
Thomson Reuters, parent company of Reuters, has a contract to calculate and distribute Libor rates for the BBA.
The British government commissioned Wheatley to report on reforming Libor and is expected to back his findings in full. Legislative changes will be inserted into the financial services bill now going through parliament.
"Today's independent report is very clear -- the self-regulation of Libor has failed. The government will respond, in full, once parliament returns," Clark said in a statement.
NO MORE GAMING
Too many traders at banks had an interest in "gaming the system" by trying to push Libor higher or lower to make a deal more profitable and pocket a bigger bonus, Wheatley says.
"They were allowed to do this freely with no oversight ... What's more and worse, is that we are not talking about a few rogue individuals, but a systemic problem."
Criminal sanctions will be introduced to punish manipulation and there will also be strict and detailed processes for verifying submissions against hard market data.
More banks will be encouraged to submit Libor quotes, using "new powers of regulatory compulsion" if necessary.
Transactions will be recorded with regular external audits of banks who participate. Bank employees making Libor submissions will have to be approved by the FSA.
Banks will have to comply with submission guidelines from Wheatley straight away until the new independent body is appointed to run Libor.
Over the coming year, the number of Libor rates will be whittled down from 150 to 20 by ditching those based on Australian, Canadian and New Zealand dollars, as well as Swedish and Danish krone.
Maturities covering four, five, seven, eight, 10 and 11 months will be scrapped, leaving 20 rates based on short maturities in currencies such as the U.S. dollar and the pound.
(Reporting by Huw Jones; Editing by Giles Elgood)