Britain’s competition watchdog is gearing up for a full-scale investigation into investment banking profits in what would be its first big inquiry into City practices for more than a decade.

The Office of Fair Trading said yesterday that it was “keen to find out more about competition in investment banking services in order to help establish whether further work in this area is warranted”.

It is understood that the OFT’s review is at an early stage. An inquiry into the way that investment banks charge for their services, including fees on mergers and acquistions deals and for underwriting share and bond issues, would be welcomed by institutional investors but could trigger alarm among banks across the City.

Robert Talbut, chief investment officer of Royal London Asset Management, said: “It is a legitimate question as to whether the financial markets are properly fulfilling their role at a cost-effective price.”

Vince Cable, the Liberal Democrats’ Treasury spokesman, urged the OFT to press ahead with an inquiry. “I want to find out why the investment banks are making such extraordinary profits on the back of what appears to be fairly straightforward business,” he said.

Mr Cable said that watchdogs should investigate the “magic circle of accountants and lawyers who are monopolising government work and other work in the City for major corporations”. He said that capable and competitive firms were being shut out of big deals.

Leading law firms disagreed. David Morley, senior partner at Allen & Overy, said: “We operate in a highly competitive global market, with over a hundred American law firms competing in London.”

Who made what

$13.4bn
Goldman Sachs profits for 2009

$11.7bn
JP Morgan Cazenove profits for 2009

£5.6bn
RBS 2009 profits from investment banking

£2.5bn
Barclays 2009 profits from investment banking