Although I do think that having local chat as default increases the RP experience, it does make the server feel more lonely and less populated.
To avoid confusion, is there any way you could replace the text "system chat" with "local chat" in the player list and chat history window? Should be a matter simple of search&replace with a hex editor.
Even better, but possibly impossible, even make 3 options: system, local, and group chat there instead of only 2?