Bankers must "pay the price" with jail if they fraudulently fix interest rates or any other market, a Financial Service Authority chief said today.
Martin Wheatley, an FSA managing director, promised to get back "on the front foot" after failing to prosecute bankers who manipulated the Libor interest rate to boost their own bonuses.
The FSA was powerless to take action against those responsible, even though their actions meant millions of mortgage holders, credit card users and businesses may have paid too much for their loans.
However, under new plans, anyone who deliberately manipulates markets for their own profit faces up to seven years in prison and multi-million pound fines.
"Society wants people who commit these sorts of crimes to pay the price and if that includes jail for the most extreme fraud in this system then that's what should happen," Mr Wheatley said.
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.
