Royal Bank of Scotland Group PLC's share price increased nearly 5% after it said that it has reached an agreement in principle with the U.S. Department of Justice to settle its investigation into the British lender's alleged misselling of U.S. residential mortgage-backed securities between 2005 and 2007.

Under the terms of the proposed settlement, RBS has agreed to pay a civil penalty of $4.9 billion, the bank said. Existing provisions will cover $3.46 billion, with the remainder to come from $1.44 billion of incremental charges in the second quarter. The incremental charges will be booked in NatWest Markets PLC, the former Royal Bank of Scotland Plc, on a consolidated basis.

The amount is lower than previous estimates of between $5 billion to $12 billion.

CEO Ross McEwan described the agreement as a "milestone moment" for the bank.

"Reaching this settlement in principle with the U.S. Department of Justice will, when finalized, 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," McEwan said.

As of March 31, RBS said it has held provisions of $800 million for other legacy RMBS matters.

RBS noted that the agreement is subject to both parties entering into a legally binding agreement.

A finalized agreement could pave the way for the U.K. government's plan to restart selling off its majority stake in the lender.