The notion of a penalty box or "sin bin" is well understood - games occasionally come with their own purgatories. But these vile aggressors are typically not made to play another game while the first one is going on, churning in their own abusive stew. Halo offered up something like this, but if this OXM article is to be believed Microsoft wants to leverage that service-wide. It makes a lot of sense to me. Like other forms of prohibition, telling people to follow rules is great and all, works for some people, but ultimately you need a lever you can throw at some point and start working to minimize harm.
I'm sure it will be fine.
There are a lot of reasons people engage in this kind of behavior; "dick" really isn't sufficient as a class descriptor. There are people for whom competition and cowing people are synonymous: they aren't two separate things, asserting one's coordinate in the hierarchy is the ur-motivator which contains both acts. There are people who are completely fine until they come into contact with one of these hierarchy people, and then they hit back twice as hard. There's the people who take the relative anonymity they have in that context and use it to say things they can't say ordinarily without physical harm or social exile. People also have shitty days on occasion.
The concern Microsoft has about their own system - one elucidated in the article - is that people use Parties to evade the community, which fragments the experience they've designed.
It reminds me of the comic we did where there is a machine that can protect you from Dogs or Witches, but not both. I'm here to tell you that they could work on their system for a hundred years and I would never, ever, under any circumstances, no, I wouldn't, I would not expose myself to that cesspit. That's not a Live specific statement - there comes a point in virtually every session where a stranger shows their ass, figuratively or literally, and I'm not obligated to absorb abuse from people. I have a machine that switches the shambling bulk of hissing, slobbering humanity completely off and I will never, ever stop using it. I'm in my living room; I'll determine who comes in, thanks.