I've run the following tests to figure out what is going on:
1. Opened blank new set and added 3 VSTs (TAL-Bassline, Sylenth & FAW Circle) into 3 MIDI tracks.
2. Then create a single clip for each.
3. I then recorded each clip in session view and modified a couple of parameters to record Automation.
4. I then went into Arrangement view and played the clips back with the automation playing! Importantly the 'Back to Arrangement' button didn't light up!
5. I then rendered each VST arrangement clip and played back - the clips had the automation.
Conclusion: Everything works as expected.
Therefore I went back to my original Live Set and ran the same tests BUT the same track (the track I first found the problem) after recording automation still switched immediately to 'Back to arrangement' on play back! The final thing I tested was to delete the whole track and set the track up again (I imported the same VST and one MIDI clip) and went through the same procedure.
This time when I went to play back the record arrangement clip with Automation it worked!!
So my diagnosis is that the clips in that particular track are corrupted in some way i.e. something sending MIDI in the session view that's overriding the arrangement.
In conclusion I have found that the automation is working and that the problem is specific to a particular track within a particular set but still don't know what exactly is the cause.
Does it sound plausible that my clips are corrupted in some way?