Wheatley, managing director at the FSA, urged “greater rigor and transparency” in the system used to set Libor.
He said that the scandal, which erupted this summer, has “torn the very fabric that our financial system is built on.”
He called for the FSA to regulate the rate, and for only FSA-approved traders to help set it.
The new approval process for those who set the rate would be similar to that used to decide whether executives meet the FSA's "fit and proper person" rules, Wheatley told CNBC.
Wheatley will lead the new Financial Conduct Authority, which will take on some of the FSA’s duties when it is disbanded next year. His sharp criticism of the financial services industry echoes that of many U.K. politicians after allegations of Libor manipulation emerged.
The rate affects huge swathes of the financial system – including mortgage rates for households.
As expected, the British Bankers’ Association (BBA) will no longer be responsible for setting the rate. Wheatley criticized them for their “careless approach” towards Libor and launched an open tender for other organizations to run the process of setting the rate.
He said that the organization that replaces the BBA must be more independent than the trade body was.
Manipulation of the rate will become a criminal offence, which the FSA can prosecute. Wheatley said that the number of banks which submit data to the panel should increase – but at the same time, the number of reference rates should be reduced from 150 to around 20.
More obscure currencies which lack a sufficient amount of trade data, like the Australian, Canadian and New Zealand dollars and the Swedish and Danish krone, should be phased out.
Many in the market have been calling for such changes after revelations about how easy it was to manipulate the benchmark rate.
(Read More:How Could Libor Regain Credibility?)
Arjuna Mahendran, Head of Investment at HSBC Private Bank, said the measures proposed were positive.
"The whole point of having an FSA accredited panel to set rates is a step forward and brings a level of professionalism to the whole process," he told CNBC Asia's "Squawk Box" on Friday. "It makes the process more transparent."
Since its inception almost three decades ago, Libor has been set at around 11 a.m. London time. Banks involved in the Libor panel send the rate at which they are willing to lend money to other banks to Thomson Reuters, via a secure network.
The highest and lowest quartile rates are removed and the average of the remaining rates becomes Libor.
In his speech on Friday, Wheatley will say: “This regulatory foundation must serve as the last line of defense, behind an overhauled governance structure, with a new, independent body, backed by a clear code of conduct, with clear rules and procedures regarding submission."
Totally eliminating Libor, which is used to set rates for an estimated $800 trillion of derivatives and debt, is believed to have been ruled out because of the sheer scale of the markets it affects.
The efforts to reform Libor are on a global scale, with Federal Reserve Chairman Ben Bernanke calling the rate “structurally flawed.” Libor was the model on which many other rates were established such as Sibor (the Singapore Interbank Offered Rate), Mibor (the Mumbai Interbank Offered Rate) and even Kibor (the Karachi Interbank Offered Rate).
As a result, other regulators may take their cues from the U.K. authorities.
Wheatley said: “It should be possible to develop a set of overarching principles that can be applied to all major benchmarks, to promote robustness and credibility across the markets.”
At Barclays, the scandal has claimed the scalps of Chairman Marcus Agius and Chief Executive Bob Diamond. The bank is now set for its biggest shake-up since the credit crisis under new head Antony Jenkins.
(Read More:Barclays New CEO’s Shake-up: What to Expect)
Royal Bank of Scotland (RBS) has also admitted it is facing fines related to the scandal – and a series of emails revealed in court documents in Singapore this week suggested that its traders openly mocked Libor and how easily it could be manipulated.
The succession process to replace Mervyn King as the Governor of the Bank of England may also be affected by the fallout from the row.
Paul Tucker, King’s deputy, was once seen as a natural successor. But Tucker was caught up in the scandal over questions on whether he had signaled to Barclays that they should keep the rate low during the financial crisis. Tucker has strenuously denied any improper actions.
