As Kilopylae has said, No, GWR are not breaking any law.
It has been said 'ad nauseum' on this forum that a Penalty Fare is NOT a fine. I realise that it is a definite financial charge, so confusion is easily understood, but only the Courts have authority to impose fines.
The Penalty Fare is a levy for failing to hold a valid ticket or pay at the first opportunity in areas where imposition of such penalties are authorised by DfT.
There is no right for a passenger to be charged a Penalty Fare or to be issued any such notice. That is a matter for the RPI if s/he is an authorised person
The decision to convert what they believed to be a prosecutable case to an administrative disposal (i.e; out of Court settlement) is entirely the prerogative of the Train Operating Company and that will be decided by the prosecution department. It is in the gift of their discretion to take that course of action if they wish. It is your right to refuse to accept that settlement opportunity and to have the case tested by a Magistrates Court hearing if the TOC continue to pursue the charge via a Summons. Once again, the decision to issue a Summons is up to the TOC.
The TOC prosecution department ( or their agents in some cases ) will normally continually assess the evidence and any new information in any case and the likelihood of a successful prosecution being the outcome. They may choose to continue, or discontinue action at any time during this process.
I cannot say for certain, but from 40-odd years experience, it seems to me that late on in the process, someone took a view and perhaps saw something that may have previously been overlooked, or some for other reason, concluded that they should not proceed.
If the TOC decide not to proceed in cases where a Summons has been issued, they must advise the Court at which the case is listed that the matter is to be withdrawn.
If a charge contrary to S.5.3 Regulation of Railways Act [1889] has been summonsed, then an AS Number will have been raised and allocated to the Summons and that will also need to be marked 'discontinued'. This should be done automatically, but it sometimes gets missed, so make sure that you check in a week or so, otherwise an apparently 'unresolved' matter may still appear on record.
From the content of this thread, it seems to me that the TOC have done nothing wrong with regard to process, but on concluding the matter perhaps they could have given clear explanation of what to do in any future similar circumstance and at least a brief summary of why they decided to discontinue.
They are not obliged to do so, but it might have helped.