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We have SharePoint 2016 On-Prem and using the Content Type Hub. We created our own custom content type for document libraries. The content type in the Hub is set to allow changes (content Type is Not read Only) However, once its published, it is set to Read Only in a Team Site. Only going to "Advanced settings" in the team site and allowing it to be changed will it associate additional columns in the library to this content type.

Is there a setting I'm missing or is this by design, or could it be a Bug?

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Yes, published content types are read-only in subscriber sites, this is by design. Ref microsoft support article.

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