FSA Managing Director Martin Wheatley

The British government has set the framework for its investigation and review of the market for the inter-bank lending rates in the wake of the growing Libor scandal which has toppled the CEO of the country's second-biggest lender and threatens to reveal malpractice inside the entire financial industry.

The UK Treasury will conduct a so-called "root-and-branch" review of how the key benchmark lending rate, which underpins more than $500tn in global securities, is set, managed and regulated. At present, the rate-setting procedures are overseen by the British Bankers' Association, a self-regulated lobby group.

Martin Wheatley, the Financial Services Authority's Head of Financial Conduct, will publish a discussion paper on his review on 10 August and report his findings to UK lawmakers - who are expected to use it to form new legislation that would make Libor-rigging a criminal offence - in September.

According to the Treasury's statement, Wheatley will also look into potential alternatives to the current Libor process and "The financial stability consequences of a move to a new regime and how a transition could be appropriately managed".

"It is clear that urgent reform of the LIBOR compilation process is required," said Wheatley. "Such reform may include amendments to the technical definitions used for LIBOR, the associated governance framework and the role of official regulation. The review will also consider whether similar measures are required for other existing benchmarks."

The review comes as the CEO of taxpayer-owned RBS, Stephen Hester, told the Guardian newspaper that he's preparing for a "our day in the spotlight" of Libor-related fines and embarrassment. HSBC said Monday it has been named as a defendant in private lawsuits in the United States related to its involvement in Libor and euro-denominated Euribor setting panels.

Last month, Barclays paid a record £290m in fines to authorities in the UK and the United States after admitting that some of its employees attempted to rig the benchmark rate. The furore led to the resignation of both CEO Bob Diamond and Chairman Marcus Agius. The bank, however, could not estimate the potential penalties it may face as a defendant in a number of class action lawsuits filed in the United States associated with Libor manipulation in a statement released with its half-year earnings last week.

"It is not practicable to provide an estimate of the financial impact of the potential exposure of any of the actions described or what effect, if any, that they might have upon operating results, cash flows or Barclays' financial position in any particular period."

Dutch authorities said last Friday they had begun looking into the possible manipulation of interbank lending rates "a while ago" after the Het Financieele Dagblad newspaper reported that four Rabbobank employees had been fired between 2008 and 2011 after an internal investigation in alleged rate-rigging.

The European Commission has also ramped-up its probe into the scandal, with chief market regulator Michel Barnier announcing plans to tighten supervision and criminalise rate-rigging if the European Banking Federation is unable to properly police the process.