There are plenty of bigger shells lying around so it's not being "denied" a place to grow, it's just sticking to it's "dwarf" size. The dwarf hermits are nice just because they aren't as "boisterous" with your delicate corals and aquascaping. Unfortunately this means you need quite a few more of them to consume the same amount etc.
Thats a really awesome macro photo you took there! Just out of interest- are all hermit crabs pretty much the same? For example I always see them in the rock pools along the south coast... Would those specimens be the same type as the one you have there?
Do they provide a cleaning function in your tank or are they more just for show?
Hermit crabs in some ways are all kinda the same. The difference comes in mainly with sizes and the types of algae they prefer. The main problem with hermits is that they grow (fast) and they are extremely strong for their size so cause your corals/rocks to fall over etc. The locally caught ones are likely to grow pretty big and become a problem. That particular one seems like he is only going to ever get that big...
As for the cleaning function, yes they do perform a cleaning function. They "pick" at your live rock, pumps, glass, substrate, etc 24/7 scavenging for anything they can get. They also eat some types of algae so are great for chowing down on that. The other popular "cleaners" are snails (nice on glass), shrimp (for bigger bits of food lying around, the cleaner shrimp for ectoparasites, the peppermint shrimp for aiptasia), and some fish like the "lawnmower blenny".