"" I feel they're missing out on having a family like their friends have. ""
They don't have the family that their friends have, even if they have contact.
What's really concerning is the way that they'd roped your DS into believing that your DD deserved to be treated badly, even physically.
They were on their way to creating an abuser and victim, in their Adult relationships. Your DD would end up with very poor self worth, if it continued.
Your MIL, is an enabler and colluding in the mistreatment.
This is beyond usual behaviour, your DH has just normalised it. It's under a very 'outside the norm' situation, that a GP would recommend that a Parent goes to SS, before family do, or, as, I suspect, to have an outsider, look at the situation.
You are absolutely doing the right thing. Children benefit from Grandparents, because it's another set of people who can love and nurture a child, which is good for their MH (as well as physical). Your children's GPs/Uncle will only damage them.