It seems like it should save as an xml file, I wonder why it doesn't?!
Time-saving feature for the game, mostly. From what I recall in the mod devchat with Derek on Monday, the game converts all of the XML files into a binary file/code it can understand. The faction files are one of the few things, outside of the ship files (which aren't XML either, for what it's worth), that are created in-game but stored externally. Thus the game is saving them in its binary format that it understands instead of reloading it and recompiling it every time it needed it. Now Derek didn't seem against the idea of storing faction files as XMLs and then have the game convert them when it needed it. But he also didn't quite see the need for it, either. Being in the middle of chat, the pros and cons weren't that easy to discuss.
The biggest pro is that it makes it far easier to mod things after faction creation. Starting amount credits, custom faction traits (especially ones that total more than are allowed by the base game), that sort of thing that the edit-by-copy-and-delete-the-old doesn't deal with as well.
The biggest cons is the extra step/time that the game would need to reprocess the faction file.
Personally, I think the pro outweighs the con. But perhaps the few amount of people who would want to edit faction files directly makes it not a priority on their part. And every time you add a feature to the game, the risks for the code blowing up increase, even incrementally. Still, perhaps if enough people ask for it, it'll come eventually. 
