You're also forgetting one important thing. Paladin's aren't some sort of holy killing machines... (okay some of the might) It's not like they look at a Caliban and go "You're HUGE! That must mean you have huge EVIL! Smite and Cleave!". Almost all of them are highly charismatic individuals, and as such they inspire others around them by their actions. Being a paladin isn't always about finding the biggest baddest thing out there and killing it. Because lets face it, if it was none of them would get past level 2.
But anyway. On Topic: Yes, Detect evil doesn't work in revaloft, OOC i think this is a serious blessing because it forces Paladins to use discernment and subtlety when dealing with other people instead of just "I detect Evil, If yes, then i kill." Leading to much better role-play opportunities and some much less stereotypical paladins.