Martin Wheatley, managing director of the Financial Services Authority, said Friday he was calling for industry responses by Sept. 7 so that proposals can be included in legislation now pending in Parliament.
"The way the use of Libor has evolved, as well as the findings from the investigations into its manipulation, highlight that the existing structure and governance of Libor is no longer fit for purpose and reform is needed," Wheatley said.
LIBOR, which has come under scrutiny since Barclays bank admitted manipulating rates, is not calculated by actual borrowing costs. It's a self-policing system, whereby banks make a judgment of the rate at which they could borrow from other banks.
Wheatley said using actual rates would overcome the problem of subjectivity, but that there would still be difficulties of setting rates in 10 currencies and 15 maturity dates when borrowing volumes are low. The solution, he said, might be to mix other transactions into the calculations.
LIBOR sets benchmarks for hundreds of trillions of dollars of contracts globally, including mortgages and commercial loans.
"So it's vital that people trust it, as so many things, from complex trading in the City through to a person's mortgage and pension, depend on it," Wheatley said.
Wheatley also said stronger powers to prosecute those who bend the rules with regard to Libor are also under consideration.
"What's clear to me is that such conduct is not a victimless act simply because it takes place between sophisticated market participants," he said. "It's clear from the reaction to the Libor scandal, that consumers think the same way."
He is also considering whether LIBOR calculations should be taken away from the British Bankers' Association and placed in the hands of a regulated authority, and whether the people who submit rates from various banks will be subject to clearance by the regulator.
The Barclays case revealed two weaknesses in the system: Individual traders in some cases sought to manipulate rates to protect their own bets in the market, while the bank also quoted inaccurate rates during the credit crisis to discourage any speculation that it was in trouble
Several other banks are under investigation over Libor manipulations in a number of countries.