kasper, yes, essentially. The information is that other apps can use the setting time zone feature via accessing your location regardless if the setting is turned off or not.
However, it appears that it is mainly Apple apps and system features. So, for let's say "finding my iPhone" if location services is turned on for that feature, then it also can use the finding time zone feature, if it's turned off. Hard to explain, but, it is concerning. Maybe not quite as concerning as you interpret it.
The issue is still ongoing, Apple support have been back & forth and there is either no solution or they are not fixing it.
At this stage, if location services uses any feature of location services. Ie. you access your maps, then the setting time zone feature will turn itself on, regardless of the setting. Then the problem is; it just keeps using the GPS until location services is turned off or the phone goes flat.
So, as you can imagine, this is really destroying the phone battery. There are plenty of iOS 10.x threads abou battery use. I'd imagine is is a major factor in this issue, although, I'm not sure how many have drawn the correlation.