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New legal headache to weigh on shares of National Australia Bank Ltd. (ASX:NAB)

If these aren’t already challenging enough times for the big banks, National Australia Bank Ltd. (ASX: NAB) is facing a new class action for selling junk insurance to students and welfare recipients.

News of the consumer class action, which was announced today by law firm Slater & Gordon Limited (ASX: SGH) and reported in the Australian Financial Review, comes on the day before the Hayne Royal Commission hands in its interim report into bad conduct by our largest financial institutions.

The share price of NAB fell 0.4% to $27.33 before the close as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index lost 0.2%.

It will be alleged that NAB and its wealth division MLC breached the Australian Securities and Investment Commission Act by knowingly selling credit card insurance to people who cannot claim the main benefits from the policy.

Slater & Gordon has not put a dollar value on the class action but said it had hundreds of customers sign up for the class action and that it believed there are thousands more who are eligible to join the lawsuit.

The AFR noted that Commonwealth Bank of Australia (ASX: CBA) faced similar allegations and refunded $10 million to more than 65,000 affected customers last year.

NAB’s insurance policy is meant to make a payout if the policyholder becomes unemployed but students who work part-time and those on welfare or have a disability are excluded from making claims. Despite this, NAB is alleged to have pushed this group of customers to buy the insurance product.

Slater & Gordon is also looking at filing similar class actions against other big banks and has said before that it was looking to sue CBA and AMP Limited (ASX: AMP) on behalf of their superannuants to recover at least $500 million.

Lawyers are also lining up to sue the banks over unethical or illegal practices in mortgage lending, so shareholders in Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) should also brace for many years of litigation.

There is also nervousness about what the Royal Commission will recommend in its interim report tomorrow. Commissioner Kenneth Hayne is expected to push for wide-reaching restrictions on the sector given the shocking revelations exposed at the Royal Commission.

If the legal and regulatory pressure isn’t enough to turn you off the banks, the risk of a protracted housing downturn should do the trick. I cannot remember a time when our banks had to jump through so many burning hoops at the same time.

Valuations might look compelling but there are still too many unknowns right at the moment to convince me to catch a falling knife – not when there are other blue-chip buying opportunities on our market.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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