Professional negligence, regulatory advice and the limits of loss

Afan Valley Ltd v Lupton Fawcett LLP in the Light of Manchester, Stanford and SAAMCO

The Court of Appeal’s decision on 5 January 2026 in Afan Valley Ltd v Lupton Fawcett LLP [2026] EWCA Civ 2 is a major reaffirmation of conventional principles governing loss and scope of duty in professional negligence claims.  While under the law of England and Wales, it may well provide further guidance for Defenders in Scotland where Pursuers seek to recharacterise commercial failure, fraud, or regulatory exposure as recoverable loss flowing from negligent advice.

In particular, Afan Valley demonstrates how the modern scope‑of‑duty framework stated by the Supreme Court in Manchester Building Society v Grant Thornton LLP [2021] UKSC 20 operates in practice, while strongly ratifying the financial objectivity reasoning in Stanford International Bank Ltd v HSBC [2021] EWCA Civ 535 and remaining faithful to the foundations laid by South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (SAAMCO).

The Background

This claim was brought by 43 insolvent SPV companies used to operate hotel, care home and student accommodation investment schemes, from which approximately £68 million was raised from investors.  The schemes offered investors “assured” returns and “guaranteed” buy‑back provisions.

Afan Valley, on behalf of these SPVs, alleged that Lupton Fawcett LLP, their solicitors, negligently failed to advise that these schemes were collective investment schemes (CISs) under the Financial Services and Markets Act 2000 (FSMA), and therefore unlawful unless authorised by the Financial Conduct Authority (FCA).  Consequently, the SPVs argued they were now exposed to investor claims under s26 FSMA and had therefore suffered loss.  By the time proceedings were brought, the schemes had collapsed amid findings that they operated as a fraudulent Ponzi scheme.

At first instance, the High Court struck out the claim and entered summary judgment in favour of Lupton Fawcett. The reasoning was that even assuming negligence, the SPVs had identified no recoverable loss.  The Court of Appeal upheld that conclusion and dismissed the appeal in full.

Scope of Duty and Manchester

Afan Valley strongly applies the scope of duty analysis articulated by the Supreme Court in Manchester.

The Court held that Lupton Fawcett’s duty was confined to advising whether the schemes were CISs under FSMA and was concerned solely with the regulatory consequences of that classification.

It did not extend to:

1. the commercial merits of the schemes;
2. their viability or profitability;
3. the risk associated with dishonesty or fraud;
4. the prospect of insolvency; or
5. losses caused by commissions, fees, or misuse of funds.

This reflects the Supreme Court’s position in Manchester that liability depends not on “but‑for” causation alone, but on whether the loss falls within the scope of the risk the duty was meant to guard against.

Identification of Recoverable Loss and Stanford

The heart of the claim was that the SPVs had become liable to return investors’ money under s26 FSMA, and that this liability constituted loss.  The Court of Appeal rejected this argument as a matter of principle.  Referring directly to Stanford, it reaffirmed that the receipt of money accompanied by an equal and opposite liability is not, of itself, loss.

In Afan Valley, it was noted that the SPVs received £X in cash and also incurred an obligation to repay £X.  Therefore, they did not in fact sustain any loss, as this is offset by funds received (the “£ in £ out” principle).  In addition, any ultimate loss arose from how the money was subsequently used or misused, in this case through fraud and mismanagement which was unrelated to the alleged regulatory misclassification.

Modernising SAAMCO

Although already modernised by Manchester, Afan Valley further modernises the logic of SAAMCO.

The Court effectively applied SAAMCO as follows:

First, assume the advice had been correct.  Second, assume the schemes were not CISs.  Third, ask whether the loss would still have occurred.

In Afan Valley, the fraud would still have happened, the schemes would still have collapsed, and the investors would still have lost their money.

Therefore, the loss was unrelated to the correctness of the advice given.

Why Afan Valley Matters

For practitioners, Afan Valley is an important and robust case that:

1. reinforces that liability is not equative with transactional or business failure;
2. prevents the expansion of professional duties by virtue of hindsight;
3. confirms that regulatory exposure does not equal recoverable loss;
4. strengthens strategies in complex negligence claims involving insolvency or fraud.

It is particularly valuable for solicitors, accountants and insurers facing claims where dishonesty or systemic business failure is the true cause of loss.

Afan Valley could therefore sit alongside Manchester, Stanford and SAAMCO as part of a set of authorities and guiding principles for professional negligence practitioners in Scotland as well as England and Wales.  It demonstrates a Court of Appeal entirely unwilling to permit professional negligence claims to function as loss‑transmission mechanisms for risks the professional was never engaged to manage.  And for professionals, it is a powerful reminder that the law compensates for negligence and not for failed ventures, fraud, or bad business.

Sian Keddie, Solicitor: ske@bto.co.uk / 0131 222 3247