Going too realistic for a developer can have them narrowing their potential customer pool to a point where it's not profitable. Aside from the developer, the Publisher and console maker must approve the content. It's an uphill battle.
Not only that, but exposure is also lower. GOW can't run on kiosks. The "Mad World" TV ad featured zero violence (but implied some ).
I'd imagine publishers (or whoever funds development) would start throwing their weight around if the target group became too narrow and the advertising opportunities too limited.
So I think in the end it will regulate itself.
Cheers