Absolutely. I don't know whether there's a reason for this timing (that is, if they are planning E2E encryption, why they announced this first), but this is probably the biggest PR bungle Apple has had since "you're holding it wrong," if not ever.
> Apple are clearly willing to add functionality at the request of governments, on device.
Maybe? I'm not as willing to state that quite as definitively, given the pushback Apple gave in the San Bernardino shooter case. Some of what their Privacy Engineering head said in that TechCrunch article suggests that Apple has engineered this to be strategically awkward, e.g., generating the hashes by using ML trained on the CSAM data set (so the hashing system isn't as effective on other data sets) and making the on-device hashing component part of the operating system itself rather than a separately updatable data set. That in turn suggests to me Apple is still looking for an engineering way to say "no" if they're asked "hey, can you just add these other images to your data set." (Of course, my contention that this is not ultimately an engineering problem applies here, too: even if I'm right about Apple playing an engineering shell game here, I'm not convinced it's enough if a government is sufficiently insistent.)
A minor interesting tidbit: your linked Sophos story is based on a Telegraph UK story that has this disclaimer at the bottom:
> This story originally said Apple screens photos when they are uploaded to iCloud, Apple's cloud storage service. Ms Horvath and Apple's disclaimer did not mention iCloud, and the company has not specified how it screens material, saying this information could help criminals.
It's hard to say what they were actually doing, but it's reasonable to suspect it's an earlier, perhaps entirely cloud-based rather than partially cloud-based, version of NeuralHash.