Morgaine is now telling me about the book in Faylen's bedroom, but I can't use the dildo as Faylen, she just keeps saying 'I can't do this here'. I've already had the story scene in there, is there another trigger I need to hit before she'll do it, or is this a bug?
I think this information you got is outdated (I just went through the same problem). For the book, posses Faylen, switch her to her lingerie (in the Party menu, top left) and go inside her room. Nel will have a moment with her, after that you can get the book. Don't know how you'd get it if you're past that.
To use the dildo on Faylen, go to Celica's own house.