I wish you would read your own quotes before getting all high and mighty. The document you quote only mentions "should" and not "must" when talking about photos. Quite a differance in law.
Anyway it's their interview process and i gues it will take a pretty brave candidate to question the legality of the application form...
The one who is rejected and has therefore nothing to lose is the one who flyBE would have to worry about. If the law says that they should not be doing it without a valid reason (and in this case I cannot see one, where identification is easily verified by photo ID at later stage), then it is clear to me that it is unlawful to ask for a photo without that valid reason.