You are correct about the components of psychic spellcasting. The GM should have looked at the rules on psychic spellcasting before allowing one of their players to be an occult caster. The rules are pretty explicit about the following:
Therefore, psychic spells never have verbal or somatic components, and have only expensive material components. Psychic spells are purely mental actions, and they can be cast even while the caster is pinned or paralyzed. Focus components work the same way with psychic spells as they do with other spells.
If a spell’s components line lists a somatic component, that spell instead requires an emotion component when cast by psychic spellcasters, and if it has a verbal component, it instead requires a thought component when cast by psychic spellcasters.
A psychic spellcaster can replace verbal and somatic components with thought and emotion components only for the purposes of the spell components themselves, not for the purposes of any other rules elements that relate to verbal and somatic components. She can’t use Silent Spell to ignore the thought component of a spell, for example. The new feats Intuitive Spell and Logical Spell serve a similar function for these new components.
But don't be fooled! Occult casters still need to concentrate like traditional casters, and psychic spellcasting can still provoke attacks of opportunity. There are even new Metamagic Feats that occult casters can use to ignore some spellcasting components.
Emotion components replace a psychic spell's somatic components. Logical Spell lets you cast without emotion components, analogous to Still Spell bypassing a spell's somatic components.
It is impossible to cast a spell with an emotion component while the spellcaster is under the influence of a non-harmless effect with the emotion or fear descriptors. Even if the effect’s emotion matches the necessary emotion to cast the psychic spell, the spellcaster is not in control of her own desires and animal impulses, which is a necessary part of providing an emotion component.
Thought components replace verbal components, and this is why defensive spellcasting is very tricky for an occult caster. Intuitive Spell lets you cast without thought components, analogous to Silent Spell bypassing a spell's verbal components.
Thought components are so mentally demanding that they make interruptions and distractions extremely challenging. The DC for any concentration check for a spell with a thought component increases by 10. A psychic spellcaster casting a spell with a thought component can take a move action before beginning to cast the spell to center herself; she can then use the normal DC instead of the increased DC.
This +10 increase in DC applies in any scenario when a caster needs to make a concentration check: casting defensively, being grappled, taking damage, being on a moving surface, being in bad weather, and so on. Unlike a wizard, a psychic may attempt to cast while pinned, although they need to succeed a rather difficult concentration DC to do so.
Emotion/thought components do not "qualify as" verbal/somatic components. So your GM's reasoning is in conflict with the RAW. When using the Cunning Caster feat, a psychic spellcaster should not take the -4 penalty (or penalties), because their spells don't involve somatic or verbal components.
When casting a spell, you can attempt a Bluff check (opposed by observers’ Perception checks) to conceal your actions from onlookers... If the spell requires somatic components, you take a –4 penalty on the Bluff check. If the spell requires verbal components, you take a –4 penalty on the Bluff check.
However, even without verbal/somatic components, psychic spellcasting is assumed to be noticeable. The caster would need to make the Bluff check.