Ok... the problem is here...
(in lib.php around line 1194)
For some weird reason Managers are failing this test when they change the course format and the page refreshes. However, once they have saved the page they now 'pass' this test. Which is confusing. It must be something to do with them not having the capability (as Managers in a higher context) in the course context... but they should surely?
Ahhh.... where does the course context come from when the course does not exist yet?
Got it... when a course is created and the course doesn't exist yet, the courseid defaults to 1, i.e. the 'frontpage' course. These users are assigned the Manager role in subcategories not the site itself. So, at this stage they do not have the 'changelayout' capability (because they have no site rights). Only when the settings page is saved and the course is created do they acquire these rights and can see the settings.