Britain tightened the screws on troubled banks Friday, vowing to overhaul a "broken" Libor interest rate system that tainted the financial sector's reputation, and threatening to jail those who abuse it. The Financial Services Authority (FSA) watchdog made the proposals in an independent report that was commissioned by Chancellor of the Exchequer George Osborne in the wake of this year's notorious Libor rate-rigging affair. Britain's banks, already being forced to ringfence retail and investment operations and boost their capital reserves, were facing even more pressure to reform as authorities seek to prevent a new global financial crisis. "The reason we are here is that we have been misled," FSA managing director Martin Wheatley said on Friday as he published his review of Libor. "The system is broken and needs a complete overhaul. The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust -- it has torn the very fabric that our financial system is built on." The Libor affair erupted in June when Barclays bank was fined £290 million ($470 million, 363 million euros) by British and US regulators for attempted manipulation of Libor and Euribor interbank rates between 2005 and 2009.The London Interbank Offered Rate, or Libor, is a flagship instrument used all over the world, affecting what banks, businesses and individuals pay to borrow money. Euribor is the eurozone equivalent. Libor is calculated daily, using estimates from banks of their own interbank rates, and affects the pricing of more than $300-trillion of contracts across the world, according to the FSA. However, the system was found to be open to abuse, with some traders lying about borrowing costs to boost trading positions or make their bank seem more secure. The FSA on Friday said regulatory and sanctioning powers -- including the threat of jail -- were now needed to punish those who attempt to manipulate Libor. "Society wants the people who commit these sorts of crimes to pay the price, and if that includes jail for the most extreme fraud in the system, then that is what should happen," Wheatley told BBC radio. -- Clear failure of banking lobby group -- His report also slammed industry body the British Bankers' Association, arguing it had "clearly failed" in its key role in setting Libor, which must now be handed to a new group. "Today we press the reset button," said Wheatley, while pledging to stamp out the "shocking behaviour" that led to systemic rate manipulation at the height of the global financial crisis in 2008. "We need to get back to what this reference rate is supposed to; restore integrity to a globally important benchmark; (and) make sure we get to a position where individuals act with integrity."Barclays is the only bank to have been fined over Libor, but it is understood that at least 15 lenders globally are being investigated for potential rate manipulation. Britain's government said it welcomed the Wheatley report, adding that it would respond when parliament reopens next month following the party conference season. Treasury minister Greg Clark, who works under Osborne, said on Friday that Libor was "another example of the broken regulatory system that this government is committed to fixing." Bank of England head Mervyn King meanwhile called for the Wheatley proposals to be acted upon "as soon as possible". Implementation of Wheatley's recommendations would come as the financial sector faces fierce political criticism over excessive boardroom pay and seeks to overcome various scandals linked to the mis-selling of financial products. The FSA on Friday recommended that Libor submissions must be supported by "relevant trade data" and "proper record keeping" with "greater rigour and transparency." More banks should be encouraged to submit rates to make the Libor benchmark more representative, while the publication of individual submissions should be held back for three months to help prevent manipulation, the regulator added The Barclays scandal led to the resignations of three leading Barclays executives -- chief executive Bob Diamond, chairman Marcus Agius and chief operating officer Jerry del Missier. The fallout risks becoming much wider, however, with analysts claiming that the lender could face massive lawsuits, since mortgage rates passed onto customers were influenced by Libor -- which along with Euribor rates are crucial to the operation of short-term financing.