George Osborne will set out plans to clean up the global currency markets in a bid to head off a potentially huge foreign exchange manipulation scandal in London.
The Chancellor will use his annual Mansion House Speech to pledge a crackdown on the "unacceptable behaviour of the few" in order to protect the wider integrity of the City, with traders caught rigging the foreign exchange (forex) market potentially facing jail sentences.
He is set to say: "The integrity of the City matters to the economy of Britain. Markets here set the interest rates for people's mortgages, the exchange rates for our exports and holidays, and the commodity prices for the goods we buy.
"I am going to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them."
Concern has been mounting about the activities of traders in largely unregulated £3.1 ($5.3) trillion-a-day forex market, which is the biggest market in the world. London is central to the foreign exchange market, known as FX in the City, with 40% of trades taking place in the capital.
Osborne will announce that criminal penalties introduced in the wake of the Libor interbank lending rate-rigging scandal, which brought down Barclays chief Bob Diamond, will be extended to cover the forex market as well as the fixed income and commodity markets.
He will also unveil a 12-month joint review by the Treasury, the Bank of England and the Financial Conduct Authority (FCA) city watchdog into the way key wholesale financial markets operate.
Regulators around the world are looking into allegations of forex manipulation, with at least fifteen banks reported to be involved including Barclays, HSBC, the Royal Bank of Scotland and Goldman Sachs.
The prices in the forex market are set at the 4pm "fix", a City benchmark set by the median price of trades taking place in a 60-second window. It is alleged that traders were putting in client orders ahead of this window in order to influence the benchmark, against which currencies are priced.
David Buik, market commentator at Panmure Gordon, told the Huffington Post UK said that Osborne's planned crackdown made "the most enormous amount of sense".
He warned that the scale of market manipulation "could get massively out of hand and make all the previous scandals look like vicarage tea parties."
Marshall Bailey, president at the Financial Markets Association, said that Osborne was taking the "right direction to restore the reputation of the FX market," adding: "The FX market must evolve and learn the lessons from recent events."
Labour's shadow Treasury minister Cathy Jamieson warned that the Chancellor's review was "too little, too late".
"We pressed ministers to regulate commodities markets and the full array of financial benchmarks back in 2012, but the Chancellor failed to act," she said.
Osborne will rule out the possibility of Britain opting in to European Union rules on market abuse, arguing that existing UK regulations are at least as tough, if not tough. Officials have admitted that there may be measures that would need international agreement.
Anthony Browne, chief executive of the British Bankers' Association industry group, said: "The UK already has one of the toughest regulatory regimes for banks anywhere in the world. If got right these proposals would be a sensible extension of that system.
"The key task for the review will be ensuring that we have a system that is robust and punishes any wrongdoing while being sensitive to the need to continue to attract global banks and investors to the UK."