I don't exactly see what is up with all this stuff about how a character with no arms has to automatically die every time combat starts, and also be helpless outside of combat. I've seen a guy with no legs climb tall mountains. I've seen a guy with no arms drive an unmodified car. Using the rules as written, in fact, a monk or a psion would only be suffering a minor setback in power by having no arms. In the Average Combat(tm), it wouldn't really make any difference.
That being said, Ogorok, I think you're going a little overboard on this guy. If he's powerful, he's powerful despite having no arms, not because of having no arms. If he's a wizard, and spent time and money and feats upgrading mage hand to compensate for the missing arms, well, he could have been spending all of that on shiny new wands or a headband of intellect or something. Or maybe I should put this a different way: if having no arms is so advantageous, why haven't all the wizards in your game world cut their arms off?
Now I'm all for an 'underdog' who turns out to be pretty much equal to everyone else (after all, he's only down a bit of money and feats - and maybe he takes advantage of the way that others continually underestimate him), and I think it would be kick-ass if you could somehow come up with an environment or scenario that puts people with arms at a disadvantage (well, other than 'there's a magical field giving you -2 for every limb you have! take that, carrion crawlers!'), turning this character into an especially deadly foe. But I would like to add in my two cents saying that if you've just arbitrarily cranked this guy up to 11 because "He has no arms! He crushes your skull like a bug!", then I would despise meeting him in-game the same way I always despise meeting the DM's pet uberwizard.