It would be good if people used their faction's equipment. But first we would need balanced weapons for all the factions. Who is gonna be, say Xenos, when your stuck with level 7 guns and your fighting police and Navy who have level 9s. Without shield busters that setup wouldn't even penetrate the Navy ship's shield. Before we could put anything like this into effect, we would need level 9 guns for each and every faction. Civilian level 9s, Rogues, Bundschuh, LWB, Molly, etc.
Also, in my opinion the faction rules are good as they are. Sometimes some factions will do out-of-RP things, such as CCE being a mercenary group, with Kusari Federal Police tags, Red Hessien Cruisers, and Rheinland/Kusari/Civilian weapons. But you can't apply their example to all other factions and say everyone is just picking a tag and doing whatever they want. I picked Zoners because they fit us the best and we would be able to follow their example most of the time. Granted, we go to war a bit more than Zoners would, but thats because we are a player faction and other factions influence our decisions, such as attacking allies of ours, whom we made allies for reasons also involving other factors that don't influence NPCs. You can't say straight down that a faction can't go to war with another. Its too limiting and gives no reason to have a player faction. If it weren't for player factions I'd have bored of Freelancer a year ago and wouldn't be here. If we impose too-strict limitations the player factions we have left will all migrate to other servers permanently.