The protest itself wasn't illegal, but the cartoon apparently was. At least, holding up a copy of the cartoon was considered to be, though apparently the original publication in the magazine wasn't.
I don't blame the police. I blame former Home Secretaries such as Jack Straw and Charles Clarke, under whose watch loosely worded legislation, ostensibly designed to combat terrorism or violence against minorities, was passed. (The New Labour period was also the time when the appalling NCHI regime was brought in.)
The police will tend to reflect the ideological values of the elites. As the latter move away from believing in individual rights, and towards collectivist values – or, in the case of academics, outright Marxism – both legislation and police discretion will tend to reflect this demotion of the individual. It's happening everywhere, but in Britain it's particularly noticeable, since Britain was once a place which had a relatively high level of respect for individual rights and individual territory.