Afan Valley v Lupton Fawcett LLP [2026] EWCA Civ 2 is an excellent reminder from the Court of Appeal that establishing a breach of duty is just one of many hurdles, including causation and scope of duty, which a claimant must overcome to be successful in recovering damages.
The investment schemes
The claimants were a group of 43 companies which had been set up as special purpose vehicles to promote schemes whereby the public could invest in long leasehold interests in individual rooms in hotels, care homes and student accommodation.
A key question in the operation of the investment schemes was whether they were ‘collective investment schemes’ (“CISs”) within the meaning of the Financial Services and Markets Act 2000 (“FSMA”). If so, the schemes would be regulated activities that could only lawfully be promoted by authorised or exempt businesses.
The defendant, Lupton Fawcett, advised the claimants on a number of occasions between 2014 and 2017 as to whether the schemes were CISs, but it was not until November 2017 that they advised the claimants to become FCA regulated. The claimants alleged that Lupton Fawcett should have advised much earlier that there was a very serious risk that the schemes were CISs and they sought damages for this alleged negligence.
The claim was considered by the Court of Appeal in the context of the defendant’s strike-out application, meaning the facts as alleged by the claimants were assumed to be true.
Ponzi scheme
A total of 22 investment schemes were involved through which over £68m was raised from investors who were offered a ‘guaranteed return’ of between 8% and 12% in annual ‘rent’ and the right to sell the room back after 10 years for 125% of the price paid.
If those extremely generous returns sound too good to be true, that’s because they were: none of the schemes were successful as investments. In fact, the claimants argued that the scheme for which they had been receiving investments was being operated by their directors as a ‘ponzi’ scheme, whereby the profits on one scheme were paid out of investments from the next. One of the directors involved had been found liable for dishonesty and breach of directors’ duties in a separate court action in 2023.
Scope of Duty
The claimant companies argued that, had they been given correct advice earlier, they would never have promoted the schemes and, on a simple application of the ‘but for’ test of causation, all losses would have been avoided because the investments would never have happened.
However, it is a principle of negligence claims that a defendant found to be in breach of a duty of care is not liable for all the losses which the claimant has sustained as a result of acting on their advice, but only for those within their scope of their duty.
Following the six part test for establishing damages in negligence from Manchester Building Society v Grant Thornton, the court looked at questions 2 and 5 which are related to scope of duty, namely:
i. The ‘Scope of Duty Question’ - What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care?; and
ii. The ‘Duty Nexus Question’ - Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant's duty of care?
In answering the ‘scope of duty question’ the trial judge had correctly surmised that Lupton Fawcett’s duty of care concerned the impact of FSMA if the schemes were CISs. On that basis, the liability imposed by FSMA to return the investments would satisfy the ‘duty nexus question’ and therefore be within the scope of the defendant’s duty.
However, the duty of care did not cover any wider questions such as the viability of the investment schemes or the risk of fraud. This meant commissions paid to sales agents and legal and professional fees for each investment were not recoverable. Those payments did not arise as a result of the schemes being CISs: they would have been incurred regardless. The schemes collapsed because of the Ponzi fraud, not the fact they were CISs.
Money in = Money out = no loss
Even the liabilities imposed by FSMA due to the schemes being CISs were not recoverable, despite falling within the defendant’s duty of care.
The main such liability was the obligation to repay the investors’ money. The fairly obvious answer to this as a head of loss was that the claimants had not suffered any detriment. It is true the claimant companies were exposed to £68m by way of potential FSMA liabilities to repay the investors, but it was equally true that if the schemes had not gone ahead they would not have received the £68m investment funds in the first place. This was described by the court as the ‘£ in £ out argument’.
Another argument was raised that FSMA entitled the investors to compensation in addition to the return of their investments and, therefore, the money out would be greater than the investments paid in. That had not been pleaded correctly, but even if it had been it would still not have been recoverable because the investors would have been entitled to compensation in the tort of deceit anyway. The claimants’ liabilities had therefore not been increased as a result of the defendant’s alleged breach of duty.
Originally published 4 August 2026.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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