I just think it's an all round bad mechanic that needs cutting.
The only time I would approve of players loosing rep is by certain actions (like killing faction ships) or by working for an opposing faction.
Considering the boring grind that I had to do to raise my rep for some factions, FD artificially destroying all that hard work so it was just a waste of time doesn't sit well with me at all.
This. Just scrap it, please, FD. Treat it as a novel idea that doesn't really work as an interesting or fun(!!!) game mechanic, an experiment that didn't work out.
I understand you want us have something we have to keep working on. We already have that: community goals, a competition with ladder-based rewards where you have to keep working on it to the end if you want to maintain your reward tier; by the time the CG you are working on ends, the next one usually has already started, so it is not as if players hadn't enough to keep themselves busy.
I'd have thought this wouldn't mean your rep would change rank - just move closer to the boundary between Allied/Friendly. Perhaps this is a bug?
You know what, that would actually make sense. Since a rank doesn't stop once it flips over, but you can gain some buffer above that (so that you don't lose allied status for one mistake), the decay could be limited to only slowly reducing that buffer to a limited (not entirely, you shouldn't be on the brink of losing a reputation level).
I still don't think any such thing is needed at all, but if FD is really dedicated to keeping rep decay as a game mechanic, limit it to shrinking that buffer.