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If you want punishment system, thats fine; don't make it 'impossible' to beat on purpose though -> point 2
If a player manages to defeat the 'high level knights' called in, they should get properly rewarded -> point 3
Reputation can be evolved into an ad hoc karma system -> point 4
Killing something = XP reward...should never consider changing such a fundamental rule -> point 5
Point 2 - Are you assuming that the "punishment" involves being attacked by Magisters?criminal elements/some other group or person?
There are other possible ways of dealing with these problems. For example, if you kill a low level trader then the remaining ones reduce the amount of gear and gold they have on their persons. Some might require cash in advance and agree to leave the goods elsewhere to be collected. Of course, some traders might then decide to disappear with your gold.
An attack on a Magister before a certain event might involve a Monopoly response "Go directly to jail, do not collect £200 etc." followed up by the loss of some choice gear.
Point 3 - This defeats the whole purpose of the original suggestion. It is a reward which is not available to "good" players.
Point 4 - This might do the job, but I think any such system might not go down well. I would prefer to approach it by considering the impact of the players actions on NPCs. For example, you are a small trader. You have just heard that another trader has been attacked and murdered and all his gear was taken. You know who carried out the attack. What would you do?
Point 5 - I don't see any reason why this should be the case. If there is no real challenge in the killing the killer will not have improved their skills.
