1) History has shown that doing it at the filesystem level causes significant compatibility issues

2) Case insensitivity can present visually confusing results

3) Round-tripping between cases sometimes is not possible without loss of information

4) Some languages don't have a meaningful definition of 'case insensitive'

5) Some languages would demand a more comprehensive approach (i.e. being able to search using either kana or kanji for Japanese filenames)

So for things like case insensitivity (or #5 above) it's best to handle them at the application (or, ideally, OS user space library) level, taking advantage of information like system locale. Low-level APIs and system services can use case-sensitive filenames.

This is different from the question of whether to normalize filenames, because filenames are still visually unambiguous (at least most of the time) in UI, logs, and debuggers.

Incidentally, Windows is proof of this technique's advantages because NTFS is a case-sensitive file system while Win32 is case-insensitive. IIRC the Linux subsystem for Windows takes advantage of this.