I recently ran through the game finishing every encounter I could find, and I had no idea there was a level cap, so it felt like it was just taking a really long time to get to 5...
Anyway you can hit 3 within a few hours, walking into the grove gate. It's a bit stingy to only give us a level 4 cap considering how much content there is to chew through after this part. My main concern is that at level 4, nothing thereafter is particularly challenging... Quite a few reloads might be required with the Spectator, a few reloads with other encounters, but nothing where you bang your head against the wall.
If these encounters were buffed, you'd expect higher exp rewards and faster leveling, but it already feels like my characters ought to have hit 5 or 6... I think a cap of 10 would be hit too quickly, with acts 2 and 3.
