Shares in Lloyds Banking Group took a hit on Monday, as the group announced it is to take a £500 million charge in its results this week to cover potential compensation costs from badly worded mortgage agreements.

Halifax admitted confusing customers about its right to charge them more for their standard variable rate mortgages. The lender raised the margin on some of these mortgages from 2 per cent to 3 per cent above base rate in January 2009.

Lloyds has set the money aside after reaching a voluntary agreement with the Financial Services Authority.

The problems relate to mortgages issued by Halifax between the years 2004 to 2007, when it was owned by Bank of Scotland. The wording of the mortgage offer documents had the potential to cause confusion, Lloyds said.

It will instigate a customer review and contact programme for customers and goodwill payments will be made to those affected. It is thought that 600,000 Halifax customers are affected, but only half of these are expected to get compensation, described as 'goodwill payments'. The £500 million provision will fully cover the expected cost, Lloyds added.

'A proactive co-ordinated programme to identify affected customers and make goodwill payments is the appropriate course of action,' the bank said.

Melanie Bien, director of independent mortgage broker Private Finance, warned that many Halifax customers will have missed out on cheaper mortgage payments because Halifax changed its SVR cap when interest rates fell to historic lows.

'While Halifax reserved the right to make this adjustment in its terms and conditions, the fact that many borrowers were not aware of it because it wasn't in the offer documentation they received, leaves Halifax on shaky ground,' she said. 'Borrowers may have chosen a different mortgage at the time if they had known so Halifax must now compensate them accordingly.'

Lloyds, which is 43 per cent owned by the UK taxpayer, releases its full-year and fourth-quarter results for 2010 on Friday. Estimates from brokers, made before the latest provision, ranged from a loss of £1 billion to a profit of £1.8 billion.

The problem was first highlighted at the time by Ray Boulger of mortgage broker John Charcol, who queried whether or not the Halifax had the right to change its SVR from a 2 per cent margin over base rate to a 3 per cent margin if the offer documentation, stating the key facts of the deal, had not explicitly mentioned the bank's right to do so.

Today, Charcol was underwhelmed by the clarity of Lloyds' statement.

'It seems somewhat ironic that an announcement which focuses on the confusion caused by the changing of an underlying cap commitment has left people somewhat confused,' said Charcol's director of marketing, Drew Wotherspoon. 'The big question is who exactly will benefit from this; and we don't know that yet. The devil will be, as ever, in the detail and we wait to see what this means for our clients with much interest.'