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I was wondering what was the purpose of varnish with scenery? Does it just protect the paint job or does it have adhesive properties (i.e. stops flock from falling off)?

The main purpose is to protect the paintjob, if you don't feel there is a need to protect it I would consider it overkill.

At some level it helps flock stay in place and not rub of so easily but there are better ways to achieve that.

Agreed. A spritz of varnish will help keep flock in place, but only to a very small degree. Problem with spraying varnish is that it's mostly going to sit on top of the densely textured surface that ground foam or static grass presents. What you need to help that stuff adhere is something that will soak down to the 'roots.'

A 50:50 mix of matte medium and water, with a bit of flow improver added, is my favored method (others just use watery PVA). I grabbed a cheap pump-spray bottle from the craft store and just hose a surface down once the initial glue has dried. By soaking in, the whole flocked surface becomes sort of 'plasticized,' increasing durability and hold. Any subsequent varnish is really just a measure to protect the paint against abrasion. I still use it, generally, but only after any groundwork has received the aforementioned treatment.