The only potential solution I have found thus far is to have a local Domain Controller and sync it with your Azure AD as Azure AD will follow the password policies of your local domain controller. On the local DC: Create a new password policy to meet your complexity requirements (or should I say lack thereof) Configure the new password policy with a precedence lower (< 200) than the precedence of the default Azure AD Password policy (= 200) so it takes priority. Assign the new password policy to the Security group where the MAC Auth Bypass user accounts will reside. Place your IoT user accounts in this Security group and change their passwords accordingly.
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