Just tried the same thing with 11Pro on 14.5 RC and Watch 5 on 7.4 RC. Device unlock wearing mask (with Watch notification) as expected as you note. Our own app, with data in Secure Enclave, locked with biometric (FaceID).. just fails the biometrics fetch while masked, falls back to normal biometric failure options.. no Watch unlock. I can see a MacOS / Catalyst flavour for LAPolicyDeviceOwnerAuthenticationWithBiometricsOrWatch but that is MacOS/Catalyst, not iOS. So I also ask the same Q ? Is there something we are supposed to do with our calls to allow our apps to also have Watch fallback ? Or is this an iOS 15+ consideration ?

We also have functionality which requires OTP to work. Without the Apple testers being able to get their phone number (in a different country) tied to the test account, Apple can't sign off. Just a suggestion, use on-device video recording (enable through Screen Recording for Control Centre) to show the whole process, import and trim on Mac, and upload as an attachment with a note for the testers re the video of the operation. Also note that you will need to re-attach the video on any successive app review processes.. the video is not retained after review acceptance, and any future tester could reject your app for the same reason, even though the functionality is already live in store.