The CMA published two studies in July which indicated that regulatory barriers and limited transparency in banking products impeded the opportunities for new entrants to gain market share from the country's biggest banks.

Despite the introduction of a number of initiatives to make the authorisation regime for new banks simpler and faster and to make switching easier, the watchdog found minimal movement in the market share of the largest banks to competitors with higher levels of customer satisfaction.

Limited transparency, and difficulties for customers in making comparisons between banks made it hard for consumers to choose the most appropriate accounts, the CMA concluded, while the free-if-in-credit model adopted by the industry was deemed to have the potential to distort competition.

While the bigger banks volunteered the introduction of a comparison Website and improved account opening standards in a bid to stave off the threat of a full-blown investigation, the CMA has dismissed the concessions and instead decided to launch a formal probe.

The investigation will be conducted by a Market Reference Group drawn from the CMA's panel of independent members. The group will publish a timetable for the various stages of the investigation and develop and consult on an issues statement, which will set out the investigation's proposed focus.

The CMA has the power to order a break up of banks considered too dominant, as well as enforcing new rules to improve competition in the sector.

The British Bankers Association says it will co-operate fully with the probe.

BBA chief executive Anthony Browne says: "There are already substantial changes currently underway across the banking industry to strengthen competition, which improves choice and service for customers.

“Banks are pro-competition - they compete for business every day. This summer we published a series of ideas to help new banks set up and smaller players to grow. We hope these suggestions will be taken up by regulators and politicians.”

The BBA's stance is in stark contrast to the strident views of TSB Bank chief Paul Pester, who says: “Consumers have been crying out for a root and branch investigation like this for years and we have previously said the CMA would be uniquely placed to carry out this complete review of the market. The Big Four banks have had a stranglehold on the market for far too long. TSB believes the CMA investigation should focus on achieving greater transparency in banking along with more choice and competition."