The boundary comes from Landmælingar Íslands, Iceland's national land survey agency. It's not easy to link to the source data, but you can get it from the örnefni IS 50V GeoPackage, available at https://www.lmi.is/is/landupplysingar/gagnagrunnar/nidurhal.

I think it's better to think of OSM as a geographic database rather than just one map rendered on openstreetmap.org. For that reason, it's better to have correct data than it is to have wrong data rendered on openstreetmap.org. Other maps and projects will benefit from having it tagged as a mountain range.

I do really think that names of mountain ranges should be rendered on the default openstreetmap.org map though. Does someone want to file a bug at https://github.com/gravitystorm/openstreetmap-carto?

I'm not convinced Fagradalsfjall should be tagged as a fell. It's a mountain, a massif, or possibly a mountain range. It's just unfortunate that usable tags don't exist, or they're not labelled on openstreetmap.org.