I have found several posts about this and as those others found, turning off “Unlock With Apple Watch” in settings on the phone under Face ID and Passcode does restore the function. However that’s the setting that allows a phone to be unlocked when wearing a mask when you have your watch on. The unlocking of the watch was very consistent prior to ios 14.7 but after that it became 50/50 for me and then 14.7.1 killed it entirely except now when turning off that face mask unlocking. Clearly a bug that will hopefully soon be addressed since masks seem to be in our lives for the foreseeable future.