I have a similar problem. I am booting from an external SSD on my M1. When I try to change to reduced security, the password dialog pops up, I enter it, and the screen goes back to choosing which drive I want to adjust security settings on, as if it was successful. When I go back in to check, it's back to maximum security. No matter how many times I try, using any of the administrator name/passwords, it doesn't stick. I tried a wrong password and the same thing happens. I had no problem adjusting the security on the native drive, though. Maybe that's a clue? The native drive is encrypted and the external is not encrypted.