I think your post title poses a really interesting question.
Schools have very different criteria for free-readers, although from reading MN posts I think level 11 (lime) is the most common. Generally I think these schools are doing their pupils a disservice.
At DDs school 'free-reading' comes after stage 17, so 6 additional colours beyond lime. Thankfully, as well as ancient scheme books, the higher stages have 'real' books too.
Matched to NC levels (as they were) I think the scheme is designed to take children to at least level 4b. Certainly DD is a 3b and on stage 15 - we shall see. I'm still not sure that a child should be classified as a free-reader even then
I think part of becoming a free reader should be a willingness (and obviously the ability) to consistently take responsibility for your own learning. For example using a dictionary to help understand new vocabulary and seeking help on how to pronounce an unknown word that has a variety of phoneme options or asking for help when meaning isn't clear.
Whilst Auntiemalcolm's DS continued to progress superbly whilst reading easy (for him) books, I've read posts on previous threads where children have failed to progress in juniors due to the badge of free reader gained in infants leading to parents (and presumably teachers) seeming to think that the job was done.
The phrase "can read anything" makes me
when in relation to free-reading infant children. For example how about some Wind in the Willows?
Spring was moving in the air above and in the earth below and around him, penetrating even his dark and lowly little house with its spirit of divine discontent and longing.
OR
Something up above was calling him imperiously, and he made for the steep little tunnel which answered in his case to the gravelled carriage-drive owned by animals whose residences are nearer to the sun and air.
Free-reading infant children may be able to read those sentences, but to fully understand them, and the multitude of similar (beautiful) sentences ... then again, this is Mumsnet 