Ok the solution to this is to enable strong password encryption on Joomla 3.2
When you install it you get the post installation message:
As a security feature, Joomla 3.2 allows you to switch to strong password encryption.
To turn strong passwords on click on the button below. Alternatively you can edit the User - Joomla plugin and change the strong password setting to On.
Before enabling you should verify that all third party registration/login, user management or bridge extensions installed on your site support this strong password encryption.
Make sure its turned on or CB registration wont work