USB C magic keyboard system keys not working with M2 MAcBook Pro

14" M2 MacBook Pro with Studio Display and new USB C Magic Keyboard (non-extended version, no touch ID).

My function keys act as standard function keys and not the system shortcuts (volume, brightness etc). I've checked in Settings > Keyboard > Keyboard Shortcuts > Function Keys and have confirmed that function keys are not enabled to use as standard function keys. I have switched this setting on and off.

MacBook Pro (14‑inch, 2023) is listed as compatible with this keyboard.

Removing the Studio Display makes no difference.

Restarting does not fix.

Any ideas?