It is not "clearly" a psych. A psychic call is a "gross and deliberate" deviation *from their agreement*. Unless you know what their agreement is, you can not decide that "clearly". It doesn't matter what *your* agreement is here, or even what "normal" is. It might be a shock here, for instance, that South is 4=5 instead of 5=5, but "mini-maxi" Michaels players - well, it's certainly "mini"!
The Director ruled it psychic based on their second-seat agreement (and possibly from their other preempt or preemptive overcall agreements). Again, I'm not going to judge that decision; I wasn't there and I didn't hear what was asked or answered. Again, I'll say that "hey, sometimes there is an advantage to actually discussing your system and knowing it"; and "learning how to explain your agreement and not rely on 'GBK' to fill in the gaps in your half-explanations can be beneficial"; and sometimes those advantages and benefits do not show up in the bidding and play.
Having ruled it psychic, we now decide what to do based on violating the system regulations. I don't know how that works in OP's RA, so I'm not going down that path either. We don't have the hands, but my impression is that failure to even try for 3NT, provided "I bid 5m as what should have obviously been a slam invite" isn't the argument, is the cause of the damage. If they were +660, and were saying that the not permitted call caused them to miss +1370, I might have more sympathy. And yes, I know there are people reading everything I've said in this thread and griping that I'm being too hard on the NOS again. And they may be right.
Off-topic, but yesterday, we had the following auction at our table:
After making it, and scoring it up, dummy asks "so, what was the alert on 1NT?" We told them, and congratulated them on believing their partner instead of the opponents. Again, we do not have the hands. But "their bidding convinced me we didn't have enough for slam, so I didn't bother to look" when they *said nothing* about points - well. And 5
♦ instead of 3NT (or whichever 3M call says "I want to bid 3NT but I need a stopper in [suit]") is giving up at matchpoints. These are the reasons I "am too hard on the NOS" - these are experienced players (albeit not in a regular partnership), and I expect them to not pull the trick of magically forgetting how to play against opponents who did "something wrong". This is somewhat independent of how I must think or rule as a director (we removed the "players with sufficient experience are expected to protect themselves against 'obvious' failures to Alert or misexplanations", for instance, in favour of other language). OTOH, it might also be my NA biases - OP says Michaels isn't the "obvious, universal" it is over here, and they may not have the reps against it to know how to think against it. However, I repeat my other example hands.
On the other hand, we also do not have the explanations for the calls taken that the TD would have asked E-W for. They could be really quite sensible (in a "make the 90% bid that partner understands rather than the perfect but torture bid, with a new partner" way) that would bring my sympathy back.
As far as "uncontested auction" goes; if this South knows that 2
♦ will be considered a psych not allowed by regulations, this South isn't passing - 1
♥ at least, and maybe 2
♥ (maybe even 1
♠, hoping to get the hearts in later). Both of which will *also* be ruled as psychic, sure - but they're permitted...
When I go to sea, don't fear for me, Fear For The Storm -- Birdie and the Swansong (tSCoSI)