Instead of gear loss how about a less harsh outcome?

[Sonic_the_Hedgehog]

It's also our choice to ask the devs to amend a crappy system. Losing the materia is one thing and I'm fine with that risk, losing the gear is another. The fact that it encourages players to run around in suboptimal gear because they don't want to convert to materia their best gear is also a huge flaw. Fix those two and it'd be a workable system.

You don't have to run around in suboptimal gear, you can buy gear always for you level and convert that into materia if you want. Also some may have two sets of gear, one they normally use and another for conversion.