The FSA could block the sale of 632 Lloyds branches to the Co-operative amid concerns that the mutual does not have the IT systems required for the transfer of thousands of customer accounts.
According to the Daily Mail, City sources say the FSA is concerned that the transfer could cause major disruption for Lloyds customers.
In 2009, the Co-op bought Britannia Building Society and is still in the process of integrating its IT systems. The work is due to be completed by August.
A source told the Daily Mail: “This will be hugely challenging for the Co-op. It is no secret that it is now behind schedule on the integration of its systems with Britannia’s.
“This kind of thing is hugely complicated – customers’ sort codes and account numbers have to work and nothing can skip a beat.”
The European Union ordered Lloyds to sell at least 600 of its branches, which accounts for 19 per cent of its total mortgage book of £341bn, following the Government’s bailout of the bank in the aftermath of the 2008 financial crisis.
In December, Lloyds named the Co-op as its preferred bidder and said it hoped to agree terms by the end of the first quarter.