RBS has paved the way for its sale back to the private sector at a huge loss after agreeing to pay a £3.6 billion fine to American authorities over the group’s role in a financial mis-selling scandal.

The bank announced a settlement – which was much smaller than anticipated – for a case brought against it by US Department of Justice (DoJ) yesterday morning.

Shortly afterwards, Chancellor of the Exchequer Philip Hammond indicated the sale of the UK Government’s remaining shares in RBS.

The Government’s bailed the bank out to the tune of £45bn during the financial crash but RBS has sustained losses of £60bn since then as the group was restructured and many of its assets sold.

Shares rose sharply after the news was announced to the Stock Exchange in a statement from the bank’s Gogarburn headquarters.

RBS reported its first annual profit for 10 years in February, a total of £752 million for 2017. That followed a £7bn loss in 2016.

The DoJ settlement is expected to take out a portion of the group’s 2018 profits, but RBS has already set aside $3.46bn and will only take a $1.44bn charge in the second quarter.

RBS stated: “The Royal Bank of Scotland Group plc (together with its subsidiaries, ‘RBS’) today announces that it has reached a civil settlement in principle with the US Department of Justice (DoJ) to resolve its investigation into RBS’s issuance and underwriting of US residential mortgage-backed securities (‘RMBS’) between 2005 and 2007.”

Commenting on the developments, RBS chief executive Ross McEwan said: “Today’s announcement is a milestone moment for the bank. Reaching this settlement in principle with the US Department of Justice will, when finalised, allow us to deal with this significant remaining legacy issue and is the price we have to pay for the global ambitions pursued by this bank before the crisis.

“Removing the uncertainty over the scale of this settlement means that the investment case for this bank is much clearer.”

McEwan said the DoJ settlement served as “a stark reminder of past behaviours of this bank that we should never forget.”

In a reference to the time when the bank was led by the disgraced former knight Fred Goodwin, McEwan added that that it was “the price we have to pay for the global ambitions pursued by this bank before the crisis”.

McEwan concluded: “Our current shareholders will be very pleased this deal is done. It does help the government sell a cleaner bank.”

Chancellor Hammond said: “I welcome the agreement in principle to resolve this long-standing issue which will, when finalised, remove a major uncertainty for the UK taxpayer.”

He added that it “marks another significant milestone in RBS’s work to resolve its legacy issues, and will help pave the way to a sale of taxpayer-owned shares”.

The privatisation of the bank will most probably come at a very significant loss to the taxpayer with Hammond already saying people should “live in the real world” and accept that there will be losses that best estimates say will run into the billions.

The disposal of the Government’s 71 per cent shareholding can be expected before Brexit – Hammond has been accused of using the sale to fund Brexit’s costs to the taxpayer.

There is some comfort for shareholders, however.

The settlement will allow dividends to be paid, including sums paid to the Treasury but more importantly will make the bank more attractive to potential investors.

Justin Cooper, chief executive of the share registry firm Link Market Services, said: “RBS’s settlement with US regulators, coupled with sharply improving profitability paves the way for the long-awaited restoration of its dividend. At first the dividend is likely to be a fraction of the £770m paid in 2007, but it will be a hugely significant milestone on the road to the bank’s eventual return to the private sector.”