The thing to realize about 4e is, it's a combat system. 90% of it is to do with fighting, which is why the aren't any rules for integrating powers into other parts of the game. This is not to say you can't use them outside of combat at all, but that you'd have to rely on your own (and GM's) judgement. So there's nothing wrong with discarding damage in general.
With regards to the specific power in question, I'd probably rule that ripping memories out of someone's head may very well result in hit point loss representing migraine they get, up to unconsciousness. I'd offer a skill check to mitigate that damage, as rolling to-hit against commoners is pointless.
As medivh points out, damage is a fickle abstraction. 4e is not made to "make sense". Ability to do more damage (and, in fact, hit points and damage as such) doesn't really correspond to anything in-world, so saying a character loses the capability to do less damage as they gain levels is meaningless. See also my old blog post.
For bonus points, here's a more generalized approach we've used in our campaign. Very broadly defined skills of 4e take care of most of the out-of-combat "fluff". Arcana lets you do magic-y stuff, Athletics lets you get places and break things. On top of this, some powers provide exceptional capabilities, extending what skills can do. Some people teleport, others rip out memories. Finally, even things like Paragon Path or feats may suggest what a character can reasonably accomplish, again, extending skills use.
When it comes to a more structured form of out-of-combat tasks, skill challenges, at-wills enable usage of a skill that would otherwise be inappropriate, or grant +2 to the skill if they're particularly fitting to the task at hand. Fitting encounter powers grant a +5 bonus, and fitting dailies grant an auto success.
This is, of course, entirely a house rule.