The cut up thing dates back to when the JAR licenses were issued.
Immediately 50% of the pilots chopped them up so they would fit in the provided book because it was obviously stupid not to.
Someone who proberly never has to carry one day in day out didn't like this and started saying that the license was invalid if it was chopped up. Typical civil servant attitude to documentation to be honest.
Then it was proved that there was nothing stopping the practise.
This time they made sure it was written that you couldn't for some reason.
The reason for not having a sensible sized license I would think is purely because they have a printer and don't want to buy a new one and want to use the stocks of paper that they already have. It could be sorted for under 500 quid in real terms but by the time you add in all the internal billing costs and training etc your more than likely looking at 10k to get a new printer in.
I am willing to bet it coming from the same people who are enforcing all the PDF security nonsense to try and get you to print out a form sign it and then scan it back in again. When its pretty well known that all you do is print the thing off as a pdf to get rid of the security after you have filled it in. Then paste in your signature with a transparent back ground and then print it again to PDF and email it in. Takes all of 60 seconds and you don't need access to scanner.