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Illegal casting and using of linked weapons without the necessary royal title leads to faction relation loss with the empire. Being enemies of the empire locks your ability to call in royal aid and trade with the empire, though trade requires someone with a Knight/Dame title anyway.
You can illegal cast without faction relation loss with a psychic silencer, which the game gives you right away, guaranteed, if you take the rebel quest.
If you are already enemies with the empire then you receive no faction relation penalties for illegally using psychic powers.
In my opinion it's better to just be at war with the empire and to stick psychic amplifiers into all of your colonists up to max. Psychic powers far outweigh the benefits of being able to call in cataphract squads as reinforcements.
Edit: Almost forgot, royals can also give speeches and hold concerts which provide long-term mood buffs for the entire colony.
You cannot trade with empire cities at all unless you have a Knight/Dame in your trade caravan. They do send tax collectors to your city if you have neutral or better relations though. You can gift them gold and slaves for royal favor. Slaves are worth Way too much right now and you can easily get the max possible royal title in your first year by trading in slaves. This is not a good idea and can cripple your colony.