I think it'd be interesting if the mechanic worked both ways and reflected the players' practical ethics, ala Karma from the Fallout series.
You're constantly rescuing the helpless, fighting against high odds, using weaker ships? +Rep
You're constantly steamrolling everybody with giant advantages in DP, you always kill enemy fleets down to the last fleeing freighter, you're constantly attacking civilians with military ships to get their loot? -Rep
Factions should have +Rep / -Rep; they aren't all morally equal, after all. That'd add a mechanic; Factions could go back and forth on the Rep charts depending on how much they decided to do the expedient thing, rather than the right thing... just like the real world.
This reputation ought to work in your favor to offset Faction feeling, among other things; if you're a really dedicated +Rep player, maybe you get a break, the next time a huge fleet of a +Rep Faction catches you, or at least offers a bribe to look the other way. Maybe Ob1-W@n gives you a ship, or even offers to join your fleet as a Captain (unique Captains w/ special perks would be awesome, btw).
If you're into -Rep play, perhaps you can get bribes out of enemy fleets, rather than face your terrifying wrath. Maybe the evil -Rep factions all agree that you're all right, rather than constantly attacking you- "Oh, Generic Captain Name, we too hate everybody! Please lead our Armada of Evil!". Maybe, like M&B, you can only get certain Captains if you're, well, bad.
It'd make being a Space Pirate or Faction privateer more interesting, among other things; you'd want to do -Rep behaviors to make money... but you'd want to do +Rep behaviors to get the bennies.