Has the Co-op bitten off more than it can chew? Central to the Co-op's predicament is Marks' decision - backed by its 20-strong board - to pursue the purchase of the Lloyds branches, known as Project Verde. Lloyds, almost 40pc owned by the taxpayer, is selling the branches as the result of a European Commission (EC) competition ruling. To those with knowledge of the Co-op, this push should not have come as a surprise. Marks has been the leading force melding the different parts of the Co-op into one and leading five mergers in the five years to 2008 whilst holding on to the top job at every turn. Marks - whom the mutual paid £2.1m in salary, bonuses and pension contributions in 2010 - has also been behind the Co-op's focus on retail and financial services, leading the Britannia and Somerfield transactions and making no bones in private of the fact that its banking business requires additional scale. At the time exclusivity by Lloyds was granted, it seemed that the decision was a win-win for both parties. For Lloyds, it worked towards the EC's November 2013 separation deadline, and met the aims of the Independent Commission on Banking which wanted the sale to create a "challenger bank" to the existing five high street giants. For Co-op, the deal would propel its existing franchise into the country's top six high street banks, giving it a projected 7.6pc share of the current account market and approximately 1,000 branches. But then the hurdles started appearing. As The Sunday Telegraph first reported earlier this month, the FSA has raised a series of questions about the sales process, questioning the Co-op's governance structure and also its funding profile. Ironically for Marks, who made much of the Co-op's mutual ownership structure in making the case to Lloyds during the earlier bidding rounds, it may be that structure which proves to be his downfall. Senior officials within the FSA are known to have questioned the Co-op's Byzantine governance structure, which involves a group board of 20 members consisting of elected members from across the country. There is also a series of regional boards and area committees. Decision making is consensual, with little apparent scope for executive powers. Much has been made of the group board - whose members include a Methodist minister, a part time civil-servant and a youth and community worker - and whether the directors are financially astute enough to meet the rigorous approved persons regime monitored by the FSA. But The Sunday Telegraph understands the regulator has also asked questions of the bank's board - which falls under the auspices of the group board - and of Marks himself. The bank board is made up of 13 non-executives and one executive, Barry Tootell, acting chief executive, who took on the role last July after Neville Richardson signalled his desire to depart. Of the 13, four sit on the group board, two hold executive positions with the group - Marks and his deputy, Martyn Wates - while another, Paul Hewitt, is the former chief financial officer of the Co-op. Of the six remaining, one, deputy chairman Rodney Barker-Bates, the former chairman of Britannia, has signalled his intention to retire, leaving only five truly independent directors including Merlyn Lowther, former chief cashier of the Bank of England, and Peter Harvey, former head of Barclays' commercial banking arm. FSA sources indicate that even if the regulator were to become comfortable with the Co-op's group board - which remains an 'if' - there is little chance that the board of the bank can remain in its current form. The deal involves the group changing from one which is currently dominated by retailing to one which consists of more than 40pc financial services. "Any institution of one kind changing to another kind needs to make certain changes to allow it to do that business effectively," said a senior regulatory source. "We would do it to anyone," said the source, adding that the reason why the FSA is being robust has been somewhat lost in the debate. One major Lloyds shareholder, aware of the discussions between the Co-op and the FSA, indicated that as well as the boards themselves, Marks' lack of banking experience was also being scrutinised. Marks has been with the Co-op for 45 years - he began stacking shelves - and his time has largely been spent in management, particularly on the retail side of the business. Also worrying the regulator is the lack of a permanent chief executive for the bank. The Co-op has so far chosen not to appoint someone because it admits privately that the calibre of person it can recruit will be different if it succeeds in buying the Verde branches than if it does not. Given the criticism it faced over the collapse of the Royal Bank of Scotland, the FSA is understood to feel that it cannot simply waive through the Co-op deal without rigorously checking its senior personnel and directors. Co-op insiders say that such extreme vetting is unnecessary and point to the last financial crisis and the fact that the Co-op bank managed to weather the storm without the need for government or other funding. Treasury sources have also indicated that the Government would ideally prefer Co-op to succeed in its pitch, not least because it meets the ICB's criteria and because it provides an alternative ownership structure for UK banking. It is not just the potential Verde deal that the FSA is focusing on. Insiders point to the 2008 merger of the Co-op's banking assets with the Britannia Building Society, and the slow integration of the two. Although Co-op insiders insist this is now complete, regulatory sources indicate that there are still question marks over the transferability of accounts between the Co-op and Britannia, and that the regulator requires assurances as to how long the possible integration of Verde and the Co-op's systems would take. This might be delayed further by the Co-op's ongoing Project Unity programme - to bring the group's businesses together under one brand and on the same technology platform. And it is not only within the FSA that problems are emerging. Although Lloyds publicly affirmed its desire to complete a deal with Co-op as recently as last Thursday, inside the bank the mood is different. Sources indicate indicated increasingly voiced concerns about Co-op's ability to complete the deal. Those same sources admit there is a risk of conflict of interest because people transferred to Verde can see the divestment pay day being much larger if the branches are separated and floated as an independent company rather than being sold to Co-op. Senior executives at the bank, such as Mark Fisher, who is running the bank's integration strategy, are thought to be keen to hasten the Verde disposal. "Their priority is simplifying the bank structure not the amount of money that can be achieved from the sale," said one source. There is also the question of whether the mutual can raise the debt needed. Options could include temporary borrowing, raising a members' bond or potential disposals, but all face headwinds. While question marks remain over the future of the Co-op's banking business the retail business is also hurting. Marks himself admitted at the mutual's half-year results last August last the prevailing climate was the "worst I have ever seen in over 40 years of retailing" with underlying operating profit in its food arm falling from £171.6m in the same period a year earlier to £135.4m in the 26 weeks to July 2. They're finding the going tough I have to say. It's a substantial presence in the industry but to our mind the fascia that's most vulnerable to present economic conditions," explains Clive Black, analyst at Shore Capital. He says that Co-op is "not a bad retailer" but has fallen behind some of its larger rivals, and needs to refocus on some of its founding virtues, such as its ethical standards and strength of community involvement. "Some of the advantages that may have given a nice warm glow around the Co-op may have cooled down," he adds. The Co-op said: "Over the past 5 years The Co-operative Group has doubled our revenue and profits and doubled our membership at a time when the economy has gone into reverse. Our banking business came through the credit crisis with its brand reputation enhanced and there is no doubt that our corporate governance framework was key in ensuring we remained focused throughout on meeting the needs of our customers. But whether its governance framework and mutual structure which has stood the test of the past 168 years can continue to hold firm given the rigours the FSA's requirements remains to be seen. It's complicated What has four main boards, five group committees, seven regional boards and 48 area committees? The Co-operative Group, of course. Rather than a single board consisting of executive and non-executive directors, the Co-op has a unique structure. The all-powerful Group board is made up of 20 elected members - from around the regions - and even Peter Marks, chief executive, does not sit on it. Beneath that are three principal subsidiary boards which run the three key businesses - banking, food retail, and specialist businesses, including its funeral arm and travel agency. No wonder the FSA is taking its time.