This law has little to do with trying to punish fake injuries. 99.9% of referees have little or no medical training and so are not entitled to decide if an injury is genuine or fake. To be honest, I've always been slightly uncomfortable with the idea that we are expected to assess if an injury is serious and requires a stoppage, or is more minor and play can continue around them - because we're not trained to make that assessment.
But anyway, the point is, for any injury we are obliged to assume that any player sat on the floor looking injured is in fact injured. So you stop play or delay the next restart, determine if they need a physio and then if so, call the physio on and ask him to move the player to the side of the pitch as soon as it is safe to do so. That's not designed as a punishment for a fake injury, it's designed to be consistently fair to all injuries (fake, minor or major) and it's designed to allow the game to continue as fast as possible.
As you rightly point out, it's fairly weak as a punitive measure - but that's because that concept was retroactively bodged into the laws at a later date. We're all open to suggestions for an improved approach, but anything you do has to bear in mind that it only takes one high-profile mistake (a referee trying to caution a player who it later turns out has a broken arm) and the idea that player safety is our top priority has gone out the window. The problem is, short of medically training every referee and introducing a provision into law that allows for the referee to stop play to carry out a medical assessment, we're limited to working on the assumption that every scream of pain is genuine. I don't quite see how we stop players exploiting that without also punishing those who, through no fault of their own, have been genuinely injured?