I do understand. Something like the conquered nations in the ancient Roman empire? They had fewer rights than the Roman citizens, had to pay tributes/taxes etc. but could also form an army fighting for the empire... or against it
As for the penalties, the most obvious one is that they don't own the cities/towns anymore, so all the resources go to the conqueror. Conquered nation captures hexes and gathers resources for the conqueror. Their only source of cards/electrum/other resources are battles and quests. They wouldn't be allowed to see the private forum sections of conquerors, although they could trade in their cities as if they were allies (unless a rebellion is in progress).
As long as they are not rebelling, they respawn at the nearest town of the conqueror, and for the purposes of skills/spells/items they treat conqueror's towns/cities as their own.
A rebellion would be a personal choice of every conquered person, so if they want a big rebellion, they'd have to convince the majority of 'servants' or else their rebellion stands little chance of victory... since any rebel cannot respawn until rebels capture at least one town/city. Rebellious servants no longer treat conqueror's cities as allied. If at least one city/town is recaptured, all rebels become once again members of their original nation, and the nation is restored.
Since 'servants' don't gain resources with every passing round, losing too many cards could be a problem for them. Maybe in case they lose too many cards to make a 30 card deck, they'd have to make some quest in the town where they respawn, that would simply take eg. 4 AP and would reward them with 12 non-rare cards, or something.