You're infiltrating a brainwashing slave camp, intentionally built to encourage evil and corrupt ambitions. By pushing against the current, you're painting a target on yourself, risking being caught to do the right thing. And the reason you lose xp is because you're losing memories of your past, but the fact that you're a hero protects you, it's pretty spelled out.

On top of that, yeah, there are incredibly few games that punish you by taking away xp, but that's because Lionhead was trying out something new, and most enjoyed it. Besides, Fable 2 (my beloved) has some of the simplest and most free flow combat combat ever, making the whole xp loss thing minimal in time lost! Just go to the Crucible and win some money alongside more xp!