I don't doubt that there are passengers willing to shamelessly take advantage of the ill-defined rules concerning service animals, but this story doesn't sound legit to me.
Accompanying them was a very large poodle wearing a "brand new" service dog vest, along with a fake diamond studded collar. (If they were real diamonds they would have been in the front cabin!) Neither passenger displayed any obvious disabilities and the dog appeared to lack even rudimentary training of a real service dog, so suspected a ruse. I asked the woman what "service" the dog provided. (God knows UA or TSA could never ask this question - their attorneys would wet their pants) To my surprise, she immediately said "none".
After going to so much trouble to "fake" a service dog, why would the "faker" immediately admit to a stranger that the dog provided no service. Sounds like they were having fun winding you up.
If I were in the position of needing to travel with a service animal, my response to such an inquiry would be, "Excuse me?", followed by, "Why would you ask?, if you persisted.
And how did the FAs handle this? You guessed it; they moved that passenger over to the middle seat next to me, which would have otherwise gone unoccupied. So not only did our fakers avoid a big fee, they got the extra elbow room of an empty middle as a reward for their fraud!