City of London banks
The UK is making it easier for new, smaller banks to enter the financial sector in order to break the dominance of the big institutionsReuters

Efforts to make it easier for new banks to enter the market are showing early signs of success, according to industry regulators.

The Prudential Regulation Authority (PRA), which is a part of the Bank of England, and the Financial Conduct Authority (FCA) said in a review of the changes that there has been a "substantial increase" in the number of firms discussing becoming a bank with watchdogs.

There have been meetings between 25 potential applicants and financial sector regulators. And over the 2013/14 year, five new banks were authorised by the PRA.

In the aftermath of the financial crisis there were serious concerns raised about the concentration of the banking sector in the hands of a few large institutions.

To increase competition for the consumer banking sector, the barriers to entry for new institutions have been reduced. Measures include lower capital requirements for new firms and a streamlining of the bureaucracy of the application process.

"It is clear that the changes introduced last year have been positive for new entrants and will make a contribution to increasing competition and thus benefit customers," said Andrew Bailey, chief executive of the PRA.

"Reducing barriers to entry can be achieved alongside continuing to ensure new banks meet basic standards that prevent risks to the safety and soundness of the UK financial system. The feedback we have received from the new banks has been very encouraging."

Martin Wheatley, chief executive of the FCA, said that the changes "will ultimately offer consumers greater choice and encourage innovation".

"In any sector newcomers to the market bring fresh thinking, and challenge established firms to consider how they can offer a better deal or improve the service they offer," he said.

"I'm keen we maintain this progress, and want to see greater competition in retail banking work for the benefit of consumers."

The banking industry also welcomed the progress.

"The regulators' willingness to take a more flexible approach to authorisation has led to 25 new banks trying to enter the market," said Simon Hills, executive director for prudential capital and risk at the British Bankers' Association (BBA).

"This is great news for customers who will benefit from more choice and innovation. We now need to build on this good start. Our competition report calls for capital rules for 'challengers' to be less onerous and for fairer access to funding and payments.

"Above all, the PRA should allow smaller banks to hold less capital against the safest forms of lending. A more level playing field is the best way to promote competition in banking – something we all want to see."