So the biggest problem with over-equipping occurs in PvP, and only twinked and over-equipped do PvP because everyone else just gets killed repeatedly.
So make over equipping illegal in PvP, simple.
That way you wouldn't have to rebalance PvM and players wouldn't be nerfed they only would be on a lvl playing field in 25% zone.
It did seem like you tried to make a PvP change but it affected human mobs? Maybe you could link it to the gas instead of the type of character