iOS 10 disable erase all data after 8 failed attempts
This may be caused by having an Exchange server configured in Mail (which can override some security settings). 

All you have to do is go to your mail accounts and delete the exchange email and you can switch it back off

I strongly assume this is it, and its MS way of hijacking what you should have full control over. (Exchange server admins can force security settings on devices if the user wants to use that account on their device.)