This example is confusing because its unclear who the trusted parties are and who you are trying to protect the data from. Quite frankly this feels like you are mostly pointing out that FHE wont work if you use it incorrectly . Normal encryption won't work either if you give the bad guy your key.

> But every FHE vendor I've seen blur that difference by not specifying what kind of attacks they protect against when they talk about "protecting privacy".

Agree with you here. FHE is an impractical technology at this stage. I'm pretty sure all commercial FHE vendors are borderline scammers, and have a loose relationship with the truth.