As a follow up, after chatting with another guy he tested it in his lab, and whilst he got this to work then only way to do it is to create the mailbox from the NP console, rather than the web interface.
Because NP is running on MAS, MAS doesn't allow for the above FCOS settings to work. Haven't found any documentation to confirm this, but from all of the testing it seems this way. Another undocumented MAS feature.
Have even got the MAS Settings set to weak, but still no go, as even that doesn't allow you to use the same password/code as your logon ID.