Due to the fact that my first rpg videogame was Daggerfall, I totally support the original poster suggestion.
The casual clothing made me able to really differentiate between my characaters, I had thos that loved formal dresses, those who use dresses that didin't allow an inch of skin to be see, those who love just loincloths and thongs (males) or bikinis (females), also there was the chance to have plain clothes to use under the armor (because armor was intended as something you wear upon your clothes, while in BG armor are clothes for battle).
