Celebrim
Legend
The boundaries seem pretty clear to me as far as the rules of the game are concerned, but in any practical sense who may establish what is going to vary quite a bit from table to table. While I take a hard line on what the rules say, at the table I may be perfectly willing to accept Frances is an old friend of a character if the player makes that offer.
I might as well. I might very well agree that the encounter is more interesting if it turns out that this otherwise nameless mook is the potentially important NPC "Francis the Guard". But then, in both cases it is the GM making the judgment call here, not the player.
There are games that allow the player to narrate details about the setting, but they then generally have some sort of rules that limit how that player may do so.
A game that does not limit what a player may narrate about the setting, violates Celebrim's First Law of RPGs: "Thou shalt not be good at everything." Specifically, unlimited unregulated fiat power granted to a player would mean the player does not have finite resources, and if the player lacks finite resources and lacks therefore boundaries on play, then you've dropped the game pillar out of RPG and properly what you have left is play, little different than a group of first graders playing make believe or (in a slightly more advanced for) a group of writers passing around a notebook and adding to a story one page at a time.
There is nothing wrong with either of those things (I've done both) but it's not an RPG by most definitions, and it will certainly strike most participants as surprising if their expectations of play are set by most traditional RPGs. Likewise, there is nothing wrong with Storytelling Games (as they are sometimes called) or Theater Games where you engage in the theatrical equivalent of passing a notebook around adding content to it, and there are few I wouldn't mind playing. But RPGs support more than one aesthetic of play, and to do so requires that they limit how setting information is added to the environment and often, who gets to do so.
I'm baffled by posters that try to argue otherwise, or even that you can take a traditional RPG and support the proposed process of play just because you'd like to do so. It's one thing to assert you are the sort of GM that would always roll with a "Francis the Guard" call out. Ok, I might buy that, but at least I'll take you at your word until I have reason to believe otherwise. It's quite another to argue that this example proves the general rule and a GM wouldn't have to (and even shouldn't!) exercise judgment regarding player call outs about the setting, and could always answer "Yes" or even "Yes, but..." to everything in a cooperative social game with multiple players, particularly if you have a typical range of players with typical aesthetics and goals of play. And it's bizarre to attempt to twist statements from the rules to try to prove that that is the intention or compatible with the normal process of play.