Ok this is a big change but would add a lot to the factions.

Since you can now change factions much quicker its kind of like who cares if you change? YOUR FACTION DOES!

How about you build faction loyalty points for killing enemies of the opposite faction, so being Evil i'd get points for killing Good mobs (or players)

Faction points could be spent at some faction related merchants or maybe require a certain amount to obtain special Titles or wear special weapons/armor that are faction specific. Like with the 'hellfire demon' and making Demon Bone armor, that sounds like Evil Only armor, make a sword out of that stuff !

If you change factions from one to the other, you dont lose your points but you have to work against them before you can start earning new faction points. So if i went to Good, when i kill Evil mobs i start losing faction points for Evil until 0 then i start building with good. So the more invested you are in your faction, the harder it will be to fully convert.