The UK will discontinue using the much maligned interest rate benchmark Libor and introduce a substitute by the end of 2021, the country's financial market watchdog confirmed on Thursday (27 July).

Libor, which stands for London Inter-bank Offered Rate, is a daily rate range for a basket of currencies, based on quoted submissions from banks of interest rates they reckon would be charged by others for borrowing money.

The benchmark, which has been used to price financial contracts since 1986, ranging from personal loans to mortgages worth over $350trn (£266.50trn) has been the subject of much controversy in recent years.

Banks have been fined billions of dollars for trying to manipulate Libor, with at least eight traders jailed for manipulating the benchmark either side of the Atlantic.

Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), said work must "begin in earnest" on shifting to an alternative index, adding that the end of 2021 would offer ample time to ensure a smooth transition.

"By having a date by which transition will need to be complete, however, we give market participants a schedule to plan to, and make it easier for them to engage as many counterparties and Libor users as is practicably possible," he said at an event in London.

Before the Libor scandal erupted in 2012, the benchmark had been compiled by the British Bankers' Association, which has since merged with Payments UK, Council of Mortgage Lenders, UK Cards Association and Asset Based Finance Association, to form a combined lobby group UK Finance.

The task was subsequently transferred to ICE Benchmark Administration (IBA), part of the Intercontinental Exchange (ICE). Bailey said Libor has to be replaced as there are very few transactions underpinning it. For instance, a mere 15 were executed in 2016 for one daily variant of Libor.

"In our view it is not only potentially unsustainable, but also undesirable, for market participants to rely indefinitely on reference rates that do not have active underlying markets to support them," Bailey added.

The FCA chief executive said banks have agreed to keep contributing to Libor until 2021 on a voluntary basis. However, if the end-2021 phase-out deadline was not proactively actioned on, there would be a "push" from the authorities, Bailey cautioned.

ICE has declined comment on the FCA's decision to scrap Libor. In theory, ICE and participating banks could continue to compile Libor after 2021, if they wanted to.

Earlier this month, Bank of England governor Mark Carney said an interest rate benchmark fit for the future be based on actual market transactions and not banks' judgements.