As I recall, Keith has added some nuance here. I think it goes something like this: Lycanthropy is going out of control* in western Aundair (what today is the Eldeen Reaches), likely due to some Archfiend bound there getting somehat less securely bound. The Silver Flame sends templars to help. Along the way, a bunch of the locals like the cut of their jib and join up. The problem eventually gets fixed by reinforcing the bonds on the archfiend somehow, but by that point the joined-up locals (who don't have as thorough a basis in proper doctrine) have gotten a bit too enthusiastic and started persecuting shifters as well.
It's also a bit annoying that the Silver Flame in the eyes of many is primarily represented by its failures, such as the persecution of Shifters and that corrupt Cardinal that's the ambassador in Sharn.
* Apparently this was inspired by the changes to lycanthropy between 3.0 and 3.5, where only natural lycanthropes could spread it in 3.5 but afflicted ones could in 3.0.