No good vs. evil, light vs. dark, etc, etc. The best system would be reputation. It was done in MW and DF, and it made more sense. You are judged by who you hang out with and your actions.
Actually, now that I think about it, they should have reputation and fame/infamy combined. If you are part of the FG, but are known to be violent or complete your missions by being more cruel, you will have a good reputation score within the FG and maybe some of the other factions that use the FG, but you are also quite infamous and may be warned to tone down the cruelty if one is way too infamous. Lets use MW's FG for example, in one mission, you are told to collect debt from the owner of the strip club in Suran. The infamous route would be just take the money from her, while fame route would be to pay it off yourself.
It was my understanding that infamy/fame replaced reputation. fame being straight-up reputation in most cases, but negative reputation in others, and likewise infamy was usually negative reputation, but in few cases (bandits come to mind) it was positive reputation
Would definitely like to see faction reputation return, though, that was what I had in mind by bigger, actual consequences. Doing something to get reputation in one guild could hurt your reputation in another.