THE Co-op's banking division has suffered a setback after admitting it needs to raise another £400m to cover past issues.

The business, set to report full-year losses of up to £1.3bn for 2013, says the matters relate to conduct and legal documentation, such as legacy PPI business.

The Co-op Bank is now under the control of bondholders as part of last year's refinancing to fill a £1.5bn hole in its balance sheet.

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Bosses say the update means the starting capital position of the bank for its four-to five-year recovery is weaker than in the rescue plan announced last year, requiring shareholders to inject another £400m into the business.

The bank said continuing root and branch reviews of processes, procedures and documentation had produced further conduct and legal issues.

In addition, one-off costs associated with the separation of the bank from the Co-operative Group have proved more costly, time-consuming and more complex than anticipated.

Niall Booker, chief executive, said: “The proposed capital raise would enable us to reset this starting point and continue with the execution of our original business plan.

“The new executive team brought in nine months ago is continuing to review aspects of the Co-operative Bank's legacy operations, assets and liabilities.

“As a result of this continuing review, we are unearthing a range of issues which the new executive team is having to address.”

Mr Booker said there were early indications of progress in its turnaround plan.

He added: “We have started to simplify the business, reduce costs and de-risk assets as we drive the change needed to return to our roots as a bank focused on our retail and small and medium-sized customers.

“However, there remain significant challenges ahead.”

Staff numbers have been cut by 1,000 in the last year, equivalent to 14 per cent of its workforce, as part of a planned 15 per cent fall in its branch estate.