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this update is all about how to lure the kettle into the steam shop to buy more games.
if you are used to the crap UI for years ofc it looks good now.
You can find the "friends & chat" setting as well as the "notifications" settings from the steam client settings menu.
To find the client settings, just click the steam icon on the top left corner of the client. Then click settings and find the setting you'd like to tinker with.
For the individual-friend setting, right-click on the friend, select Manage->Notifications.
Both options are still there.
1) they would change this
2) they would reset your settings with the update.