Our front door electric mortice (intercom) is faulty: when it is released via trades button/internal intercom button it remains openable, so needs replacing.

It is a fail secure type, but there is an Yale lock enabling egress without activating the electric mortice or need for key.

I told the locksmith there is an electric mortice available at Toolstation for £15.

He said it was a fail secure type and therefore would be breaking fire regulation fitting, it, it would put the safety of residents life in danger, and I would be liable for corporate manslaughter.

Is he correct?

No, sounds like scaremongering to get you to pay him to supply & install his choice of fitting for an appropriate price. If the lock can be mechanically released in the direction of escape by a simple single operation with no need to operate the electronic locking mechanism then it should be fine, like with the non deadlocking night latch below.