In Drosophila, defects in asymmetric cell division often result in the formation of stem-cell-derived tumours. Here, we show that very similar terminal brain tumour phenotypes arise through a fundamentally different mechanism. We demonstrate that brain tumours in l(3)mbt mutants originate from overproliferation of neuroepithelial cells in the optic lobes caused by derepression of target genes in the Salvador-Warts-Hippo (SWH) pathway. We use ChIP-sequencing to identify L(3)mbt binding sites and show that L(3)mbt binds to chromatin insulator elements. Mutating l(3)mbt or inhibiting expression of the insulator protein gene mod(mdg4) results in upregulation of SWH pathway reporters. As l(3)mbt tumours are rescued by mutations in bantam or yorkie or by overexpression of Expanded, the deregulation of SWH pathway target genes is an essential step in brain tumour formation. Therefore, very different primary defects result in the formation of brain tumours, which behave quite similarly in their advanced stages.