Standard Life, last of the Scottish mutuals, presides over Edinburgh's changing scene

City's rock-solid establishment is giving way to leaner and nimbler competitors

Standard Life, the Edinburgh-based insurance company that once prided itself as the very cornerstone of the Scottish financial services industry, will face its policyholders today to explain what, by any standards, has been a stark reversal in fortunes. Its troubles have raised fears that the Scottish capital's once venerated financial community is beginning to crumble.

Edinburgh has long viewed itself as a rival to the City of London with its abundance of major financial services companies. It is the home to RBS, formerly the Royal Bank of Scotland, and HBOS, the merged Halifax and Bank of Scotland, two of the biggest companies in the UK. Indeed one in 10 jobs in Scotland is in the financial services sector. More than 200,000 are employed in and around the sector and more than 50 per cent of companies increased staff numbers during 2003, according to a recent report from Joslin Rowe. But the same survey shows a third of companies are planning to cut headcounts this year.

Standard, which hosts its annual general meeting today less than a week after announcing it is to surrender its mutual status, is already axing 1,000 jobs and many fear that the move to public company status will mean a lot more redundancies.

Edinburgh is still reeling from the news of Standard's dramatic volte face. The company is renowned for its iron grip on Edinburgh and staring down from the executive offices of its Lothian Road headquarters and enjoying one of the best views of Edinburgh Castle going, it is indeed easy to feel like you own the city. Standard even has the clout to force the bus companies to run on Hogmanay so that those staff who need to can make it into work.

While the other Scottish insurers - Widows, Equitable, Amicable, Mutual, Life and Provident - have all succumbed to demutualisation and new owners in recent years, Standard's unstoppable rise to become market leader in the UK while staying mutual has been much envied.

No wonder, then, that when the Sheraton hotel was built next door, users of its spa whooped with delight at being able to recline in the roof-top hot tub while watching the Standard Life ants in action. Even Mike Ross, the former chief executive of nearby Scottish Widows, had a telescope in his office thought to be fixed on Standard.

But things are changing fast, with consolidation and takeovers aplenty, and Edinburgh institutions seem to be falling prey more than most. Walk along George Street, in Edinburgh's New Town, and you will be hard pressed to find a bank that is not now a trendy wine bar. A flagship RBS branch, with a magnificent marble banking hall, is now a restaurant and nightclub. An old Clydesdale Bank branch, now owned by National Australia Bank, is an All Bar One, and in a former Bank of Scotland branch, former customers queue for a pint in what is now known as The Standing Order.

At least Scotland's banks have shrugged off their parochial image and produced record growth, witness RBS's £6bn profit last year. Takeovers of Scottish life insurers have not been as successful. Three years ago Abbey paid top dollar for Scottish Provident, but last month it closed its Edinburgh office, threatening 700 jobs and wiping out the brand. Scottish Widows, for which Lloyds TSB paid £7bn in 2000, is also now under review.

St Andrew's Square, a marvel of Georgian architecture, was once bordered by eight life insurers in the days when the Association of Scottish Life Offices (Aslo) was in charge. The only life in the square now is in the tills at Harvey Nichols, which opened there in 2002. "The Scottish life offices were too resistant to change, through a combination of complacency and arrogance," James Gilchrist, the retired sales director of Scottish Life, says. "They didn't manage companies as businesses, in the way entrepreneurs would. They were actuaries and thought they were infallible. If you didn't play by Aslo rules, such as on commission rates, you got kicked out. When some competition finally came along, they couldn't cope."

The New Club, once the refuge of the Edinburgh banking elite, is now often deserted on a Friday lunchtime, save for a few ladies clad in pearls and tweed. They discuss credit cards, but only to compare how many reward points they earned at Jenners department store - not APRs. The new generation in financial services hangs out at the Hallion Club, co-founded by a fund manager.

Fund management in Edinburgh is by no means dead. Half a mile from St Andrew's Square, at the other end of George Street, lies Charlotte Square. It was once home to a host of fund managers and merchant bankers but as the life insurers took over the running of their own billion-pound portfolios throughout the 1990s, many disappeared. In the adjoining streets, however, boutique investment houses are emerging that are outperforming the behemoth life companies. Baillie Gifford, Martin Currie, Aberforth and Artemis are Edinburgh's fund management success stories. Edinburgh Partners, set up last year by Sandy Nairn, the former head of Scottish Widows Investment Partnership, is another of this new breed.

"Scotland has a very established tradition in the investment trust sector and we want to continue that with " says Mr Nairn, who raised £22m for an investment trust last year when the markets were in turmoil, and is firmly focused on managing global funds.

Away from the city centre, a new hub for modern, cost-efficient financial services is forming, out in Edinburgh Park. It is a dull collection of functional office buildings that could be in any city, anywhere. Here sits Aegon House, far removed from the blackened granite grandeur of Scottish Equitable's original headquarters. The former mutual faced up to the capital needs of the business more than a decade ago, and was one of the first to demutualise and enter talks with a larger parent. Aegon, the Dutch insurance giant, stepped in and the business was slimmed down and shipped out to nearer the airport. "We have a London-facing business, a European-facing business, a global-facing business," says Otto Thoresen, the finance director of Aegon UK. He blames the "limited gene pool" of management in many Scottish insurers for their ultimate demise. "When we joined the Aegon group we suddenly had access to European management ideas and an enormous capital base. To operate in the price-capped financial services sector, you have to have this."

The Scottish Equitable brand is under review, a testament to its declining value. Scottish Widows is one of the few still actively promoted, as is Bank of Scotland, although mainly for business banking. "I don't think customers see 'Scottish' as being important. We are part of an international group and we want people to know about our global position, rather than our Edinburgh one," Mr Thoresen says.

Defenders of the Scottish brand name believe that it does carry connotations of being "canny" with money. But even RBS has been less than committed about the Scotland affiliation and its senior managers spend a lot of time running the business from London, as does James Crosby of HBOS.

Sandy Crombie, the chief executive of Standard and a product of Edinburgh's actuarial clan, will have to come down from the management floor and look south beyond the Castle to London, where its future will before too long.