I actually think the circles being disbanded but Templars kept around (on a very short leash) would be the best outcome. Templars wouldn't so much as be jailors as they would be an arm of the city guard or something. An elite few who are the ones to handle things if an abomination wanders into a city square or a mage thinks it will be funny to start lighting cows on fire, not a gigantic army that watches mages 24/7. And mages would be part of the Templars, because a mage is one the absolute best people out there when it comes to other mages. My spirit mage Hawke is such a mage, and with dispel I can pretty much completely disarm enemy mages to the point that they never get a spell off. Templars are kind of crappy versions of spirit mages, so a combination of Templar and spirit mage would be the best possible team for dealing with demon and mage trouble.
This is my ideal solution. No more circles, Templars are just a specialized version of city guard, and Templars actually allow mages into their ranks since they make better Templars than actual Templars in some ways.