The FSA chief admitted society has "lost confidence in banks, in finance and the whole system".
He said it would strip banks and their industry body of responsibility for calculating Libor to protect consumers from further harm.
"We need to restore that so what we doing today is to bring forward, at least for this part of the industry, a complete overhaul to bring that confidence back," he told the BBC.
The regulator has been under pressure to scrap the whole system of Libor, after Barclays was fined £290 million for rigging the interest rate and dozens of other banks remain under investigation.
Mr Wheatley acknowledged the system is "broken" but said getting rid of it would cause "huge disorder".
"The point we made in the review was that it is so widely used across the world, there are so many trillions of dollars worth of contracts that there would be huge disorder if we simply removed it and said actually it no longer exists, so people need to know what the price of money is, what the price of equity is, so we need benchmarks, we just need them to work and to tell the truth."
He admitted that regulators had failed to act quickly enough over Libor, but promised reforms of the system would prevent further wrongdoing.
"The question about regulation is whether always is it always backward looking and shutting the door after the horse has bolted or whether we can get onto the front foot and the message the message I am giving to people is that we are going to be on the front foot," he said.