The Derek Conway affair is not the first, nor likely to be the last, in a long line of political scandals over money. While such scandals have formed a steady trickle for generations, the floodgates seemed to open 18 months ago with the cash-for-peerages investigation. It may be tempting for politicians to argue that each scandal is separate from the others, but the British people simply don't see it that way.

It's time to admit there's a pattern here. The relationship between money and politics is rotten, and it is hollowing out our whole political system. Public cynicism has never been greater. The details of the latest scandals, while of obsessive interest to the Westminster village, mean little to the public. They don't distinguish between MPs pay and expenses and dodgy donors to political parties. All they remember is the association between politicians, money and scandal.

No political party should believe that any partisan advantage can be gained from the latest rash of revelations. We're all in this together. It is politics itself, not one party as opposed to another, that is on trial.

So we have a choice. Either we fix the problems now, or British politics will follow the United States into big money politics, with political influence bought and twisted by the influence of cash. The US presidential election has already cost well over £250 million, and there isn't even a single candidate selected yet. The whole system, with lobbyists and special interests fighting over the pork barrel buffet, is driven by money. The political rhetoric may soar, but everyone knows the rules of the game are set by money.

If we want to avoid this fate, all parties at Westminster must move fast to pick up the tatters of the cross-party talks on funding. I want to see agreement by October, and a new party funding settlement in this November's Queen's Speech. I've been told that's impossible - too quick for political negotiations and too quick for the Civil Service to manage. These excuses are woefully out of step with the political urgency needed to clean up our act.

To make it happen, we must all let go of partisan special pleading. Big money donors, union funds, state investment in the parties: all must be put on the table. This has got to be an all-or-nothing negotiation. And once legislation has passed, all parties must commit to abide immediately by the spirit of the law: there must be no Last Chance Saloon for raking in cash under the old rules.

We must have proposals that we all agree will take us away from the culture of a small number of big, self-interested donors. We must have proposals to deal with transparency and linkage in respect of trade union affiliation fees - and limit donations that come on top of those affiliation fees. No party should revert to tribal type simply to get the best deal for itself. Whether it's Labour's protection of trade union funding, or the Conservatives' defence of Lord Ashcroft's millions, vested interests that are blocking reform must now be overcome.

Relying on a very small number of high value donors spells trouble - for all political parties. Surely the aim should be many more donors, paying smaller amounts? I believe Sir Hayden Phillips's proposal of cutting the maximum donation to £50,000 is a good start, but does not go far enough. I would halve it: we should be aiming to agree a whole package of reforms that, once in place, allows no individual to contribute more than £25,000 a year to a political party. This will affect all parties' fundraising. We have all received donations larger than this in the past, but should, together, agree to focus on more, smaller, donors.

And caps on donations are only one side of the coin. We also need caps on expenditure, nationally and locally, and not just during election time. Over recent years central parties have increasingly spent large amounts in certain marginal seats on material that does not specifically refer to a candidate and thus falls outside the existing expenditure limits. That's clear abuse of the spirit of the legislation but protected by those for whom the loophole is convenient. Sir Hayden's recommendations are a good starting point but, again, should be pushed farther.

We should also ban non-domiciled taxpayers from taking a position in Parliament. No one should be able to vote on our laws who does not pay our taxes, and the House of Lords should review the tax status of all its members immediately.

Of course, under any system political parties themselves will need to continue to exercise judgment and discretion on whom they accept money from. But the acceptance of all donations must be made transparent so people know who is paying for the leaflets that come through their door.

And finally, we need to reinvent the Electoral Commission. It must be a bloodhound, not just a watchdog. It needs proper powers and resources for proactive investigations; simply rubber stamping submissions made by the politicians is not enough.

Anecdotally, it seems a culture of diligence that came in when the new rules were introduced several years ago has fallen by the wayside. The passage of time has made people complacent, and compliance is quietly dwindling - so the Electoral Commission needs sharper teeth.

I want to see a staff of forensic accountants who can check up on national and local parties' accounts and chase up on potential infringements. It shouldn't be left to the newspapers to check up on donations and uncover mistakes or wrongdoing.

We need a solution that is fair, transparent, sustainable and effective. We need parties that subscribe to the spirit as well as the letter of the law. We need a new political culture. Nothing less will be good enough: for the British people, or for British democracy.

Nick Clegg is leader of the Liberal Democrats

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