The option that you're describing only affects when the user is logging in via a social network and is brought to the JFBConnect login / registration view. If you're attempting to create a Joomla user from the SCLogin register button we are simply redirecting to the Joomla users component, but don't have control over the username is shown on that view. If you believe you're at our login / registration page, please provide more details/screenshots/specific URL that you're seeing the behavior for.
That setting only affects JFBConnect's registration page. If you have Automatic Registration enabled, then most users will skip our registration page entirely. Only users that don't have an email set in their social network or ones that are using a social network that doesn't provide an email addres (like Twitter) will see our registration page.
In those cases, with that setting, the field should be hidden and a username will be created for the user automatically.
I hope that helps,