It's sad how these situations arise just because neighbours don't talk to each other.
If my neighbour suddenly announced they were starting to build an extension that day that was close to the boundary I too would be less than happy. I would probably take the view that if they are so ignorant as not to have the common courtesy to knock on my door a few days before just to let me know then they are probably ignorant enough to ignore Planning, Building Regulations, Party Wall Act etc. etc. (and put a boiler flue close to boundary so the neighbour got the benefit of the fumes)
I would give them one more chance, I would approach them and express my concerns about the boundary retaining wall. If they reassured me that they had taken it into account and the foundation depth would not affect the wall I would probably let it go but continue to monitor the work very carefully. I would expect the extension foundation to be taken down at least to the level of the retaining wall foundation. If they continued with the ignorant inconsiderate selfish approach it would be time to start getting awkward.