Critics have been calling for a better system for years, pointing out pilots can face 100 assessments over their career while doctors effectively have none.
The campaign gathered momentum after the Harold Shipman murders.
The GP murdered more than 200 people over a period of 23 years with the inquiry into the case raising concerns about doctor regulation.
There will be two strands to the new system called revalidation.
Relicensing will apply to all doctors and will be based on a strengthened annual appraisal process in which patients are likely to have an input.
Meanwhile, recertification will only be imposed on the most senior doctors.
It has been suggested this could include some kind of computer simulation model.
Pilot
However, Sir Liam's report, Medical Revalidation: Principle and Next Steps, said the full details of both strands of revalidation will be designed, consulted on and piloted over the next 18 months.
Roll-out will start from 2009 and 2010 in England, although timings could differ elsewhere in the UK following discussion with the devolved administrations.
Sir Liam said: "At the moment, we rely on trust - and that is right - but we want to underpin that with more objective evidence."
And he added as well as "weeding out the bad doctors", the system was being designed to improve the standards of all those practising.
Dr Hamish Meldrum, chairman of the British Medical Association, said almost all doctors already went through an annual appraisal, which examined their continuing education, and prescribing habits.
He said the new system would take this a stage further, but while it was important to demonstrate to patients that doctors were keeping up to date, it was also vital that the assessments did not become too burdensome.
He said: "We are anxious to see that any system is proportionate, that it does not take doctors unduly away from their patients, and that it is fair to doctors.
"But in principle we support the idea that doctors should be looking to improve themselves."
However, Dr Martyn Lobley, a GP in London, warned it was not straightforward to assess a doctor's capabilities, as often the job was to tell people they were not ill.
"That is what this appraisal system really can't pick up on," he said.
Claire Rayner, president of the Patients Association, said: "I'm delighted.
"It's a complicated business, medicine, to say the least, and it is much too easy to say: 'All you have to do is get your qualification, shove up your plates, and get on with the job'."
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