James Moore: New watchdog must tell banks to toe the line on Libor – or else

Outlook Now let the squealing start. If there's one thing former colleagues of Martin Wheatley are united in praising, it is his forensic approach. That will be seen in his Government-commissioned report into Libor fixing today.

Mr Wheatley has correctly identified that the system of compiling Libor interest rates is broken. But we're pretty much stuck with it, so how to make it work and ensure there is no repeat of the attempts to fix it by traders at Barclays and others?

Bringing it under regulatory oversight and making false submissions subject to explicit criminal sanction ought to mean that they will never be required. The fact that they are there should serve as deterrent enough. If they don't, prosecutors at least won't have to prove fraud (more complicated) and an investigation won't require the services of the Serious Fraud Office (phew).

Meanwhile, the British Bankers' Association, having been subjected to a much-deserved shellacking, won't be sorry to see someone else taking the thing off its hands.

Where vested interests may start to get twitchy is in Mr Wheatley's sensible suggestion that important banks should be forced to make Libor submissions where they don't now. Already some banks have pulled out of Libor or Libor lookalike panels that set similar rates (Euribor, etc). Forcing them to perform a volte face will not be popular, but it is necessary. If you're going to impose regulation and threaten sanctions on those who are involved in submitting it, it can hardly be right that some banks sit out and get a free ride. That's where the squealing starts.

Then there's the issue of turning 300 rates into just 20. The financial world will not come to an end with the abolition of New Zealand Dollar eight-year Libor, but there will probably be someone, somewhere in the City who will be a mite peeved at its demise.

And sadly, even the 20 different benchmarks that remain will have imperfections. While the top 20 are the most widely used, there will still not always be enough transactions out there for submissions to rate setters to be based on actual rates paid. There will be an element of supposition and judgement involved when a bank makes a submission, and the submitter's job is going to be a nerve-racking one with the potential of criminal sanctions (so gimme a raise).

What allowed traders to play fast and loose with Libor in the past is the fact that the rates submitted are all too frequently based on what banks expect to pay to borrow rather than what they were actually paying. During events like the financial crisis no one lends to anyone else, so how could it be otherwise?

While the new system will be better, it will still have "issues", despite Mr Wheatley's best efforts. Over time, it would serve everyone for alternatives to be formulated, and not just when it comes to interest rates. A huge range of contracts (gold, silver, wheat, and so on) are priced off submissions by banks. Mr Wheatley referred to them, and put them on notice: principles are likely to be formulated on which all these benchmarks should be based.

Perhaps the only thing missing from Mr Wheatley's speech today, then, is a certain phrase: "Or else."