It was very unprofessional and wrong of them to lead your brother and SIL on like that, and then suddenly pull the rug. Of course they will be devastated by it :(
Names are honestly a bit of a complex area. There are lots of different things to consider, people have wildly varying opinions and experiences, but in my experience social services will often only support a name change when there is a security problem - eg. a name like Cinderella (I made that up, I don't know of any child called Cinderella) is a problem because the child could be traced as a child or adolescent, and you would have to never let the childs name appear anywhere etc
Whilst I can't say for sure why social services have said no to a name change, their reasons are (IMHO) likely to be - that his name is his identity, and changing it is therefore not good for him, only good for the parents. They might also say that his name is one of the only things his birth parents have ever given him, and it would therefore be important to keep it.
That isn't the opinion of all LA's/VA's or SW's by any means but those are IME the usual objections raised to a name change by SS
I changed my son's first name (but his original first name is a middle name) for many reasons, but a security issue with certain people was one issue. In my case, although the placing LA weren't initially on board, my son was actually placed with me before I talked name change, so there wasn't really anything they could about it. As it was, they came around a bit to my view on security, but it would have been easier if everyone was on board to start with (my own SW was fine with it, it was the placing authority, which is another example of different agencies having totally different policies on the same issue. Happens a lot in adoption)
We did have quite a long thread on here about first name changing and we were all expressing our own views and experiences - maybe you'd like to read it? It's here