The "watchdog" is a KC (senior barrister) officially appointed to review the legislation. He's warning that this could be considered hostile activity under the act, which would be a bad thing. In other words, he's criticising the act for being overly broad, a view that most on HN agree with, and his criticisms of it presumably carry some weight, given his official role.
As usual, this has provoked a load of ill-informed knee-jerk rants about the UK government from people who didn't read past the headline. This act is an absolute stinker, but let's maybe criticise what's actually happening rather than some imagined cartoon variant of it.
edit: I misunderstood the poorly-worded headline. It should have been something like "Creating apps like Signal could be 'hostile activity' according to govt., claims UK watchdog".