Thanks for the replies everyone
Hatsumomo - that's a big relief.
WebyJ - Yeah, she knows that now about recorded delivery, I just feel they should have told her, I mean she told the guy she was alarmed at the idea of sending the passport, so he took photocopies and stamped them and gave her a receipt, but didn't bother to tell her about her options for having it returned. IMHO it seems logical that she would assume they would take care of her passport, I mean the implication of giving a receipt is that DVLA were taking responsibility for it, and sending a passport by regular mail isn't taking care of it.
She has held licences in Minnesota and Western Australia, in both places you go to the local office in person and don't send valuable documents through the mail. The passport has now been seen by both the Edinburgh and Swansea offices, but she can't apply for a provisional licence now, because she has no valid ID to give them (!), which is potentially delaying her finding a job as so many insist on a licence.
(To clarify, the guy at DVLA Edinburgh wrongly advised her to try to exchange her Australian licence to avoid taking the test, despite the fact that the D1 form asks "If you did not take your test in the issuing country, where did you take it?". As the answer was USA, her application was rejected, so she is down 50 quid, 1 Aussie licence, 1 marriage certificate, 1 passport, and unable to apply for a licence)
Am trying not to rant, honest