British finance minister George Osborne will reject European Union plans to outlaw currency market manipulation on Thursday and instead set out his own proposals to make rigging exchange rates a criminal offence.
EU laws taking effect in 2016 will make it a criminal offence with a four-year jail term to rig key prices in a wide range of financial markets.
But Osborne does not want these laws to apply in London, the world's biggest center for currency trading.
Instead, he wants a panel led by the Bank of England to recommend new criminal sanctions which meet the needs of London, where much of the loosely regulated $5-trillion-a-day trade in foreign exchange takes place.
Britain has already introduced a maximum seven-year jail term for trying to manipulate the LIBOR interbank interest rate, and plans to introduce similar criminal penalties for rigging benchmarks in currency, commodity and fixed income markets.
"Our own rules will be as strong or stronger than those of the EU, but will preserve flexibility to reflect specific circumstances in the UK's globally important financial sector," Britain's finance ministry said in a statement late on Wednesday.
The opposition Labour Party said Osborne was acting too late to root out malpractice, and critics are likely to warn that the new legislation will be excessively influenced by Britain's financial sector.
But rejecting EU proposals may please lawmakers in Osborne's Conservative Party who oppose transferring more powers to Brussels. The large number of Britons who voted for the anti-EU UK Independence Party in last month's European Parliament election may also welcome the move.
Osborne has already clashed with the EU over laws which limit bankers' bonuses, and Britain has the right to opt out of EU rules that involve criminal penalties.
The British Bankers' Association welcomed the plan. "The key task ... will be ensuring that we have a system that is robust and punishes any wrongdoing while being sensitive to the need to continue to attract global banks and investors to the UK," its chief executive, Anthony Browne, said.
Osborne will detail the proposals in a speech to London's financial community on Thursday evening alongside BoE Governor Mark Carney, and will stress the importance of integrity in Britain's financial markets to the economy as a whole.
The move was not completely unexpected. Osborne said last week that he wanted to boost the integrity of London's markets, and the chief executive of the ACI umbrella group for currency traders told Reuters new criminal sanctions were likely.
More than 40 currency dealers around the world have now been fired or suspended following claims that traders used client order information improperly to attempt to manipulate prices. But no-one has been prosecuted under England's existing laws.
Osborne is expected to argue that UK-specific laws are not about favouring London's financial sector - which in the past has been a major source of tax revenue and economic growth - but about ensuring rules are appropriate to a financial centre that dwarfs those in most of continental Europe.
"I am going to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them," he is expected to say at the Lord Mayor of London's ornate Mansion House residence.
Britain's Financial Conduct Authority is investigating allegations that there were attempts to manipulate benchmark foreign exchange rates in London, and is only due to report back on this early next year.
The finance ministry wants the new rules to reflect those findings as well as a report due in a few weeks from the international Financial Services Board chaired by Carney.
As well as criminalising benchmark price manipulation, the proposals suggest requiring branches of foreign banks operating in London to meet stricter rules on senior staff that are due to apply to British banks from next year.
Under these new rules, senior staff will be directly accountable if a bank goes bust, making it easier for regulators to prosecute individuals than after the 2007-09 crisis.
A review of the new legislation will last a year and be led by Minouche Shafik, a senior International Monetary Fund official whom Osborne appointed to take up a new role as a BoE deputy governor responsible for banking and markets.
FCA chief executive Martin Wheatley and a senior Treasury official, Charles Roxburgh, will also be involved. Elizabeth Corley, chief executive of Allianz Global Investors, will represent financial industry views.