An ISP can carry out DPI as and when it wants or needs to, they keep the data for an extremely short time. Should the government ever enforce a system by which the ISP's police the Internet, then they will have to use this method.
In the UK, we dont really have a concept of 'Wire tapping' laws like they do in the US. Phorm is potentially illegal in the UK, but not under any one law. This would make it hard (but not impossible) to prosecute over. However, we are not talking about Phorm here, we are talking about ISP's inspecting their own traffic. I think the acts concerning this topic are the Data Protection Act, the Privacy and Electronic Communications Act and the Fraud Act.
Under the Regulation of Investigatory powers act 2000 it is an offence to intercept any communication, without lawful authority, in the course of its transmission on any public telecommunications system at any place in the United Kingdom.
Under this act any internet system available to the public is considered as a public telecommunications system (they define telecomunications as the transmission of communications by any means involving the use of electrical or electro-magnetic energy deliberately to include computer generated traffic).
This basically means that ISP's are only allowed to inspect headers etc that are necessary for the functioning of the network. They may not look into data packets themselves for any reason without lawful authority.
Phorm and the like is an argument for another day.