I believe it depends on the user visibility of the H1 tag. It's fine to make H1 tags smaller and in odd positions - it would be difficult for Google to be overly punitive on creative design of this sort.
I've created H1's smaller than H3s on many occassions. The question for me would be - is the new H1 the same or very similar colour to the background? Is it in an incredibly small font? Google is wise to attempts to "almost hide" content.
I would ask why the SEO can't be more creative and make the content more visible. If h1 tag and keyword in it isn't appropriate there is something wrong with the overall content or keyword choice for the page.