(Reuters) - The Australian Federal Court has dismissed a petition by the country's corporate regulator against Commonwealth Bank of Australia and its pension unit on allegations of improperly collecting commissions, the regulator said.

The petition arises from the Royal Commission inquiry into the country's financial sector through 2017 to 2019, which uncovered widespread misconduct in the sector including pushing unsuspecting customers to buy financial products without proper disclosures for commission, among others.

However, the dismissal of this petition by the court is a blow to consumer advocates who wanted tougher regulation, and also absolves CBA of some of the most damaging allegations aired at the inquiry.

The Australian Securities and Investments Commission (ASIC) in June 2020 filed the petition against top lender CBA and Colonial First State accusing it of a scheme where the bank took commission to sell products for its unit from 2013 to 2019, a banned practice known as conflicted remuneration.

CBA sold the pension product to about 390,000 of its customers in branches and online, amassing more than A$22 million ($14.27 million) in fees, the regulator had alleged back in 2020.

The regulator said on Thursday that the court found that the payments made by Colonial to CBA did not constitute benefits within the definition of "conflicted remuneration".

CBA in an emailed response to Reuters acknowledged the judgement, but refrained from commenting any further.

($1 = 1.5420 Australian dollars)

(Reporting by Sameer Manekar and Byron Kaye; Editing by Rashmi Aich)