Azure B2C Custom flow using .xml configs is not working

Question

Hello Microsoft team our situation today:
We use "User flow" for our SPA, we have 2 instances of B2C test and production on two different tenants in our azure portal
Situation today is that user reset password is not working on production instance of B2C, but works perfectly on test
We don't know exact moment this issue appeared, but when user goes into reset flow after submitting verification code he is redirected back to previous state see image bellow basically user is in infinite loop of sending verification code and never lands on "old new pass reset form

After multiple checks between two tenants we compared every setting in two B2C apps including flows template version, we tried custom template default templates but nothing seems to work on production instance user still stuck in reset flow (on test all works fine different tenant and B2C)

So we decide to try the "Custom policy" we followed the official docs to make a reset flow seamless without handling error AADB2C90118 by following this documentation that recommend using Self-service password reset (recommended) but we encountered another issue users can't login with the new flow so now we are stuck in limbo, on one had we have old setup that works fine except reset on the other hand we have new flow that does not even login

Let me know if you need any additional info

When it comes to xml config we used default Local starter pack + some modifications to support self service reset, and yes identity and proxy ids are set properly and proxy uses offline access form identity exposed api

We also tried to create new identity and proxy from scratch following the official guide with all permissions etc. but it resulted in the same login issue shown on screenshot above