By Louise Greenwood BBC Radio 4's Money Box

Fifty thousand people who put over �1bn pounds into Lloyds TSB's Extra Income and Growth Plan (EIGP) are being advised not to accept the bank's compensation deal for any losses.

In an unprecedented step, the Financial Ombudsman has written to warn investors that if they accept the bank's offer to reimburse them, they could lose out substantially.

The plan - a Scottish Widows product sold by Lloyds TSB between October 2000 and May 2001 - offered a fixed income payout of over 10% a year, or guaranteed growth if the cash was kept invested for the whole three years.

But the capital was at risk, something many people say they were never told.

EIGP was invested in a basket of shares, including technology stocks like Marconi and Vodafone, which have plummeted in value.

Complaints upheld

In January 2003 the Financial Ombudsman Service upheld a complaint from an investor who lost money, opening the door to thousands of similar cases.

Since then, Lloyds has been writing to customers offering to reimburse them.

Now the Ombudsman has warned people of the problems with the Lloyds offer.

Lloyds is only offering to repay the initial investment plus interest at 3%, based on what investors would have got if they had put the money into one the bank's savings accounts.

But where the complaint has been resolved through the Ombudsman's service, the interest rate has been much higher - around 6% - as it has been based on what a high interest account at the time would have earned.

'Fifty per cent losses'

High income bonds, like the Lloyds product, were flavour of the month for a short time and many investors who have lost out will want compensation.

I think it is down to individual cases as to whether they understood what kind of bond they were taking out and the risks associated with it IFA Kerry Nelson

Independent financial adviser Kerry Nelson from Bates Investment Management told Money Box:

"Two or three have matured and in general there has been about 50% losses (in capital)...

"I think it's very much down to individual cases as to whether they were mis-sold or not, and whether they understood what kind of bond they were taking out and the risks associated with it."

In the case of Lloyds, customers have been given 30 days to accept the bank's offer.

The Ombudsman says that if anyone takes the deal and signs a "Full and Final Settlement" there is almost no chance of them having their case reviewed.

Potential fine

Lloyds TSB is also being investigated by the Financial Services Authority over the way the plan was sold.

Although official statements haven't come out from either the ombudsman or Lloyds, there are discussions going on Independent financial adviser Kerry Nelson

It could face a large fine and be forced to reimburse everyone who bought the plan, not just those who complain.

Kerry Nelson says the bank's interim results released on 19 July show Lloyds is already anticipating a large bill.

"It's very clear that they are making some kind of provision (for compensation)... Although official statements haven't come out from either the Ombudsman or Lloyds, there are discussions going on."

Financial advisers say customers who bought Extra Income and Growth and haven't complained yet must do so, but warn that if they have had an offer from Lloyds they should ignore it or risk losing hundreds of pounds.