I believe this to be a foul, and a free ball.
Firstly, as you state in your question, to be snookered behind the previously nominated free ball is a foul - as stated in Section 3, Rule 11 of the WPBSA Rules:
11. Penalty Values
The following acts are fouls and incur four penalty points unless higher penalty points are indicated in paragraphs (a) to (d) below
(a) Value of the ball on by:
- (viii) causing the cue-ball to be snookered by the nominated free ball, except as provided for in Section 3 Rule 12(b)(ii);
And in Section 3, Rule 12:
12. Snookered After a Foul
After a foul, if the cue-ball is snookered (see Section 2 Rule 17),
the referee shall call FREE BALL.
(b) It is a foul if the cue-ball should:
- (ii) after a non-scoring stroke, be snookered on all Reds or the ball on by the nominated free ball, except when the Pink and Black are the only object balls remaining on the table.
Secondly, to cover Player 1's point about not being snookered because Player 2 can hit one half: this is not true as a player is required to be able to hit both sides of an on ball to not be snookered, as defined in Section 2, Rule 17:
The cue-ball is snookered when a direct stroke in a straight line to every ball on is wholly or partially obstructed by a ball or balls not on. If one or more balls on can be hit at both extreme edges free of obstruction by any ball not on, the cue-ball is not snookered.