People familiar with the Scottish financial sector have known for years that behind the big investment management institutions many people toiled in the less glamorous business of fund administration, trusteeship and custody.

But it was only recently that much was heard about the firms that employed them. The new prominence of what is loosely called custody (though not much is actually carried out in Scotland) is partly due to changes of ownership on the Scottish scene.

Edinburgh now has offshoots of State Street and Bank of New York, two US banks that bestride the global industry. And the sector is expanding as more fund managers outsource their administration.

The business is underpinned by strong growth in the Scottish fund management industry, with funds under management rising by a quarter in 2000 to £351bn, confirming Edinburgh and Glasgow as the sixth biggest fund management centre in Europe. And some fund administrators are gaining business from outside Scotland, too.

The first big change was the sale by Bank of Scotland of its unit trust trusteeship business to State Street in 1998.

The US bank marked its arrival in Edinburgh with a big summer party and has been assiduous in keeping its name before the public ever since, sponsoring an exhibition at the National Gallery of Scotland.

State Street inherited 45 staff in Edinburgh with Bank of Scotland's trustee business, added fund administration for UK unit trusts and open ended investment companies, and now employs 150 people. Last autumn it gained the contract to provide custody, trusteeship, accounting and investment administration to Scottish Widows, the Edinburgh-based life company now owned by Lloyds TSB.

Though only part of the trusteeship work on Widows' unit trust, life and pensions funds is carried out in Edinburgh (the rest is done in London where State Street employs 800 people) the Edinburgh office is trustee for £55bn of funds, most of it placed by other Scottish clients. Of the £55bn, Scottish Widows accounts for £17bn, transferred from WM Company, an Edinburgh-based performance measurement and fund administration company, now part of Deutsche Bank.

Bank of Scotland's exit from trusteeship was followed in 1999 by the decision of its rival Royal Bank of Scotland to sell its custody and investor services business to Bank of New York (BoNY) for more than £500m.

Bank of New York's global custody operation is in Brussels and other functions are in London, but BoNY's David Fortune says: "It is a little known fact that we employ 192 people in Edinburgh. We have space for 80 more and are gently moving jobs (not people) from London to Edinburgh. That's an indication of the stability and quality of the personnel available here."

According to Benji Fraser, deputy head of European sales, BoNY has a relationship with 75 per cent of the companies on the Scottish fund management scene.

The Edinburgh office services Scottish global custody clients and does fund administration for Scottish institutions. It does not release figures on its business.

Royal Bank of Scotland did not leave the sector altogether: it retained its Trustee and Depositary Services, based in Edinburgh, which supports 64 clients from the UK and Europe and acts for funds with a value of £60bn. It employs 207 people.

Although most of the Scottish back office sector is based in Edinburgh there is one big company in Glasgow, Clydesdale Bank, part of National Australia Bank.

Richard Dudek, head of sales and marketing, says it is the only company that actually has its custody operation in Scotland, looking after £56bn worth of assets, as well as doing trustee and depositary work.

For a long time the US investment house Fidelity was its biggest client with £17bn of its UK assets in its custody, but recently the Boston-based institution centralised all its custody work elsewhere.

Clydesdale then gained £32bn of UK assets as sub-custodian from Mellon Financial, the US financial services company. It employs 184 people in the centre of Glasgow.

Back in Edinburgh the US financial services group JP Morgan Chase is building on the businesses that came with its recent purchases of Chase Manhattan and Robert Fleming. It maintains its George Street office for marketing its custody and fund administration services, while Hexagon administration services provides third party fund administration services for the UK unit trust industry. It is soon to move its 150 people to Edinburgh Park, a prestige business location.

Neighbours will include HSBC Global Fund Services, which was created by HSBC to provide investment administration and performance measurement consultancy for investment funds and started operating in late 1999. It is headed by Stewart Crawford, formerly managing director of WM Company, who brought several colleagues with him.

HSBC invested about £20m in GFS before going looking for business. An important success was winning the administration contract for Gartmore's unit trusts when the fund manager decided to outsource.

Its 150 people administer assets of about £40bn, winning the performance management contract for HSBC's pension fund - against stiff competition from outside the group, Mr Crawford insists.

In Glasgow Clydesdale is soon to be joined by Cogent Investment Operations, part of the Australian AMP Group. It will administer funds run by Aberdeen Asset Management which last year bought the Glasgow-based Murray Johnstone.

Scottish Financial Enterprise, the industry trade body, reckons that 3,000 people are employed in fund administration in Scotland, if those working for companies that do their processing in-house are included.

With the industry growing rapidly and the danger of staff shortages increasing, 16 companies recently came together to form Scottish Investment Operations.

It aims to ensure a regular supply of high quality recruits by promoting fund administration to schools, colleges and universities and will enhance the provision of training.

The industry hopes to reap the benefits in two years time when the recruits reach the labour market.