They have it limited to 32 GB to prevent piracy, using anything more than that requires third party software etc and would be considered console-bannable.
You can get a larger hard drive without buying a new system, the HDDs are sold separately.
the max 32gb on fat32 comes far before the consoles got usb ports.
Do you have any credentials for this cause it seem highly unlikely that antipriracy is reason?
They simply removed in "newer" windows the option to do more than 32gb with fat32 because fat32 gets really inefficient with space on such big drives ( big cluster size).
So its more a move to push ntfs on bigger drives and just keep fat32 on small drives for compatibility with embedder devices (fat32 support takes less resources than ntfs support)
swissarmyknife (free program) can format fat32 to the full size of what fat32 support (cant remember it on top of my head).
we used to use this program back when kiss made hdd recorders where you could exchange the drive.
The hardware controller supported "big drives" but the os/firmware only supported fat32 (like xbox) so you had to format a big drive with fat32, which windows didn't offer anymore at that time.
swiss army knife fixed it