The government is under pressure to urgently implement proposals to overhaul the setting of Libor that could result in anyone attempting to rig the key interest rate going to jail.

The proposals from Martin Wheatley, a senior official at City regulator the Financial Services Authority, followed the £290m fine on Barclays for attempting to manipulate the rate, which affects borrowing costs for households and businesses around the world. They came with a warning that other firms faced sanctions for similar offences.

Wheatley wants the FSA to be given criminal powers to deal with rigging of Libor rates and to be responsible for authorising managers and their subordinates involved in making submissions used to compile them. While the firms themselves were authorised, the market was not regulated by the FSA, which means it is currently up to the Serious Fraud Office to decide whether individuals can be charged.

Wheatley told BBC Radio 4's Today programme that in future jail should be a threat for anyone attempting to manipulate the rate.

"Society has lost confidence in banks, in finance, in the whole system, and we need to restore that," he said.

"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's what should happen," Wheatley said.

Sir Mervyn King, governor of the Bank of England, called for the 10-point plan drawn up by Wheatley to be "implemented as soon as possible", although he conceded that "further thinking" was needed for a long-term solution to the market which is used to set borrowing costs on financial products worth $300tn (£185tn).

Wheatley's proposals involve stripping the British Bankers' Association of its role in compiling Libor and replacing it with a new body – in the next three months – to be selected after a tender process kickstarted on Friday. Thomson Reuters, also involved, was unable to say whether it would tender.

Libor is currently set by a panel of banks asked the price at which they expect to borrow over 15 periods, from overnight to 12 months, in 10 currencies. The rates the banks submit are published on the same day.

Wheatley proposes that those 150 benchmark rates are reduced to just 20 – in five currencies and four maturities. More banks should participate in making submissions, but he is proposing that the individual rates submitted should not be published for three months to avoid a rerun of 2008 when, at the height of the banking crisis, rates were artificially reduced to avoid any stigma of appearing to be in trouble.

He acknowledged that there needed to be an international debate about alternative benchmarks; the news agency and data provider Bloomberg was quick to say it was looking at devising alternatives, dubbed Bibor.

Wheatley conceded that regulators should have moved more quickly to stop the unscrupulous behaviour in the Libor market, but said the management at banks knew that the culture needed to be changed.

"People don't change their spots overnight… but nobody wants to work for an organisation that is constantly vilified … The tone at the top is changing," he said.

The Treasury appears ready to back the proposals, drawn up after a short consultation. Greg Clark, financial secretary to the Treasury, said: "This report makes a series of comprehensive and practical recommendations designed to restore its credibility."

Andrew Tyrie, the Conservative MP who chairs the new cross-party commission on banking standards, described Libor as "a catastrophe for the credibility of financial institutions more widely".