According to IGN, Ubisoft did indeed experiment with a fully free-form sword control setup, but scrapped it because it felt and played poorly. I can see where they are coming from -- every play that Namco sword game in the arcades? You can basically wave the sword around aimlessly and do fairly well, your attacks never meet with any sort of resistance (blocked attacks just pass through without damage), and so on. Red steel's swordfights would have likely turned into a remote wiggle-fest, which is less than immersive and most likely why they witched to the preset gesture system.
As far as the revamp goes, my guess is that they are simply implementing a far wider range of recognized gestures. Instead of a single downward slash gesture and animation, I would bet that there would be a much wider variety corresponding to a good number of different angles for the same basic motion.
Still, the freeform control scheme could possibly work... perhaps during swordfights, free perspective control is deactivated and the analogue stick lets you advance, retreat, as well as circle the opponent, which the camera locks on to. The remote is now able to be manipulated freely. Wild flailing motions could do minimal damage if they connect, and perhaps the AI could recognize such motions and respond with a simple one-hit kill thrust or stab making it an unwise strategy. Blocks could be achieved by appropriately angling the sword or by tossing the nunchaku forwards, like at E3.