I just tested this and this is how I did it. I didn't find any problems unless I missed something..?
I got the instructions from here: http://forums.taleworlds.com/index.php/topic,149007.15.html
Find the file "presentations.txt" and back it up before editing in case you accidentally break anything. Find "prsnt_name_kingdom 0 79 2", then find these numbers "16711680". This is the RGB colour code for your faction. Change this to colour you like. Google RGB colors if you need help finding the correct code. Then start the game, change the name of your faction for the colour change to take effect. Then change it back.