I think a flagging system is needed, not only for the lore based cities(Tindrem) and other major cities - But for guilds to have some form of control over their lands too(when TC finally comes in MO2). It's also apart of the games roots, dating back to when MO was a concept based on Henriks experiences with Ultima Online, which had a very similar flagging system, but a far more finer tuned system.
MO1's flagging system was far from perfect, but was needed, just needed better implementation. I personally think flagging should only be within the boundaries of a city or an empires borders(territory), and in the "wilderness" everyone is neutral flagged, unless that land is within a guilds territory and they have something set, like X Guild/person = Bad = grey/red in my territory. With a single character(or two depending on how many accounts you'll have), it'll be harder to maintain a good standing within MO2.
My only gripe with the flagging system in MO1 was the lack of logic behind it, and how people could just willingly give out a murder counts in the middle of nowhere, even though the combat was mutual and both sides agreed to cross weapons. Also, the whole aspect of Guards chasing you miles out of a cities boundaries was a bit of a joke at times, them MO1 Meduli guards would chase to Sardoodoo bridge.
The only reason people aren't being pricks right now for the most part, is because there's nothing in the game to gain right now, it's pretty bare bones in terms of content and playability. I also heard people were getting banned for interrupting/griefing group fights, testing systems etc ? So that probably plays into a part of the whole not wanting to commit to being a dong aspect, right now lol