Agreed. I can understand in an RPG-style game or PvP-centric game where you may not want people tricking others into thinking they're wearing something other than what they are. (Although even progression MMORPG's now have 'transmog' / cosmetic options, despite that.) But in Ylands, it seems like more of a creative / cooperative exploration/PvE-survival game, no real reason it would be problematic.
I'm all in favor of letting people visibly show whatever armor they fancy, while letting them equip underneath whatever quality of armor they've acquired. It's not exactly realistic, but it doesn't seem like that big a deal.
Some of my favorite aesthetic choices are clothing sets in Ylands, but I know statistically they pale in comparison to certain armors in the game. It's just a really crappy feeling to be torn between "Do I wear the good stuff" or "Do I look cool and how I want to?" The above situation lets you do both, and be happy. If not, it's been proven that generally people will gravitate toward "the best armor they can get", and a lot of the simple clothing would go unused and unseen.