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Don't change anything in options, but you still can change template difficulty for other achievements
There is, however, a quick and dirty way. Just select the peaceful scenario and then add some bandit camps in the game setup. This way I managed to get the acheivement after defeating the first squad. After the martyrdom of trying to do it the proper way, it almost felt like cheating.
NOTE:
1. Be sure to lower the Public Order in priority since it's the main factor that cause a family turn into bandits.
2. In order to do so, build tavern, don't assign family to work, and set high tax rate(I did it with 30~40%, increase it slowly), AND even demolish the market which gives more disapproval.
3. If the Approval drops too much before the Public Order declines, family will have a higher chance leaving than turning into bandits.
4. I did it with Approval below 20 and Public Order between 60-70.
5. Same situation as Tropoebus, I got the achievement only after I defeated the second bandit I encountered. Tearing down the camp is NOT necessary.
Can i use the retinue army or i can only use mercenaries?
"The Merchant" only works if it's your initial settlement, if you get any new settlement in a different region it wont count.