London's Libor interbank interest rate is "no longer fit for purpose" and reform is needed in the wake of the rate-rigging scandal, Britain's financial sector watchdog said Friday.
Martin Wheatley, who heads the conduct regulation unit for the Financial Services Authority regulator and was appointed by the British government to review Libor, made the announcement at a press conference in central London.
"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," he told reporters at the presentation of his initial discussion paper.
The Wheatley review was also to examine potential reform of the current framework for setting and governing Libor. It will seek to work out the best way in which to tackle abuse, and examine whether policy changes are needed.
The Libor scandal erupted in June when Barclays bank was fined £290 million ($452 million, 360 million euros) by British and US regulators for attempted manipulation of Libor and Euribor interbank rates between 2005 and 2009.
Barclays was the first bank to be fined as part of a global probe into suspected manipulation of the twin interest rates that are crucial to the operation of short-term financing and global markets.
Wheatley added on Friday: "What is clear, is that the past few months have presented a series of very significant reputational challenges for the financial services industry.
"The attempted manipulation of Libor and its European equivalent Euribor have cast a shadow over the industry at large and the construction and governance of the benchmarks themselves.
"Trust in a vital part of the financial system has been lost, and timely action is needed to regain it," he added.
The Libor system has been found to be open to abuse, with some traders lying about borrowing costs in order to boost trading positions or make their bank seem more secure.
Libor (London Interbank Offered Rate) is a flagship instrument used all over the world, affecting what banks, businesses and individuals pay to borrow money. Euribor is the eurozone equivalent.
The Libor rate is calculated daily by data provider Thomson Reuters, on behalf of industry body the British Bankers' Association, using estimates from banks of their own interbank rates.