It works well at small scales, but you still have the power problem: torpedo's usually have less of it available than subs.
The magnetic parts can, depending on the design, be shielded. It would certainly be possible to limit the magnetic field in the case of a MHD duct going through the ship. For external MHD drives, it would be harder.
http://syd.mech.eng.osaka-u.ac.jp/pa...94/05_IMDC.pdf
http://www.mesj.or.jp/mesj_e/english...n011995p46.pdf
Wikipedia also may be useful for some links related to magnetohydrodynamic systems.