Yeah, from a story perspective it makes sense for them to lose all their equipment, but from a gameplay perspective, if you did that then you'd discourage people from caring about gold (both obtaining and spending) in the first act. Unless they lost their gear for a brief time period, then it might work out okay, but for an entire act? Why bother buying anything? (Or rather, just buy all the one-shot items that are powerful because anything permanent will go away.)
True, I was concentrating mainly on the story. I've played at least one RPG before where, between episodes, all my character's money, weapons and even house were taken away. After a brief 'WTF?'-moment, I was fine with that, but I was not fine about some of my levels and skills disappearing, too. The material things can be taken away for all I care, if it benefits the storyline
, but for taking levels and skills away .... that
would really need some fancy story-telling to have it not hurt "just" the gameplay. I hope that won't happen!
Fighting with bare hands? Nuuuu....that's not what I was going for. Thinking back to stories like Spartacus, the Gladiator, Dragonlance (the Twins' story, Caramon having to fight in mock-gladiator fights), one of the things that happened was that the arena slaves/fighters did not get to use their own weapons, but were given some weapons by the Arena. This makes sense, as then the fight organizers have more control on the fights, and even a possibility to "cripple" a certain fighter they want to die (or, more likely, a certain slave owner they want to lose) by giving them a bad weapon. It's like rigged dice. But with more mortality.
Why risk letting the fighters keep their own weapons? What if one of them has the Hawk Blade or something?
Anyway, I'm not trying to insist that the weapons should be taken away. If they'll stay in the game, there are plenty of ways to justify that as well, like it was already pointed out.
As to the pelts.. do we really know that dishonest actions during the first Act don't have repercussions later on - say close to the end in Act IV?