The government failed because to introduce personal use exception because it did not follow the rules and was using a statutory instrument rather than primary legislation. I would note that the government lost in a UK court and not the ECJ. The basic rule that they lost against while an EU rule is that you cannot take away someones property (and the UK court decided that IP is property) without either giving compensation or having proper evidence that there would be no financial loss. They did neither of the above so it was ruled illegal because it was a statutory instrument and not a piece of primary legislation.
There are a range of options open to the government to introduce a personal use exception that would be beyond legal challenge. It's not clear which route they will take, though with Brexit it may well now be on the back burner for the next decade as parliament is going to be very very busy dealing with the legislative fallout from that, so the simplest way to fix the problem pass a bill through parliament is probably out the window.
The next best one is to have evidence to show that a personal use exception would not cause any financial loss to the IP holders. This is the very very narrow point on which the government lost the case. In fact it was even narrower than that, as it was argued that the fair use/personal exception might encourage wider infringement leading to a financial loss to the IP holders and the government didn't have any evidence that this would not be the case.
I actually don't think it is hard to come up with that evidence and I also think that the lack of fair use exception makes it more likely I will infringe IP. Simply put in the UK it is just as illegal for me to rip a CD I own into MP3 format as it is to download it from some torrent site on the internet.
However you are totally correct about the 10 year penalty, you have to be doing the copyright infringement for commercial gain to be liable for that penalty. Better still if you make a copy of Taylor Swift's new album maximum damages are *ACTUAL* losses, which is less than Â£10, and hence never ever going to be prosecuted in a court.