noblues - the radar that we use displays vertical position as altitude below the Transition Altitude (6000ft) and this is shown as two digits irrespective of your altimeter setting and as Flight Level which is shown as three digits when above Transition Altitude.
I would guess that the controller was either still thinking "altitude" when you were stopped off or he/she is ignorant of the fact that you are permitted to change to Standard Pressure Setting as soon as you are cleared to a Flight Level.
I note that you say the QNH was only 5mb different from 1013 and I am guessing that it was 1008 as you expressed concern about a potential level bust. If that was the case then the minimum stack level referred to by foo fighting would have been FL80 and stopping you at FL70 would obviously have been an acceptable solution if the conflicting traffic was at FL80.
I think you have good grounds for filing a report of some kind because irrespective of the problem that occurred on the day you received a solution which put you in a difficult position and I think these things should be brought out into the open.