Wasn't arkay originally a mortal man like talos once was? I recall hearing or reading that he was but if it is true why hasn't his worship been banned by the thalmor?

Because he just cares about dead people, not the living. The Thalmor want humankind dead.

I don't remember for sure, but I think Arkay was an Aedra who became mortal and died, sort of the inverse of Talos.

I dont think the thalmor want humankind dead just controlled.

Thalmor are not against men that turn into gods. They are against a god that is holding the world together, that individual happens to be Talos. To unmake the world they must first severely weaken Talos.

Member of the Nine Divines pantheon, and popular elsewhere as well. Arkay is often more important in those cultures where his father, Akatosh, is either less related to time or where his time aspects are difficult to comprehend by the layman. He is the god of burials and funeral rites, and is sometimes associated with the seasons. His priests are staunch opponents of necromancy and all forms of the undead. It is said that Arkay did not exist before the world was created by the gods under Lorkhan's supervision/urging/trickery. Therefore, he is sometimes called the Mortals' God.

http://www.imperial-library.info/content/nine-divines-arkay