London FX Investigator-in-Chief Says Nothing Surprises

“Manage your guilt.”

That’s Tracey McDermott’s strategy for not beating up on herself about missing dinner at home with her kids or skipping exercise, which the director of enforcement and financial crime at the U.K.’s Financial Conduct Authority has plenty of opportunity to do these days.

The daughter of a road paver and a primary school teacher, McDermott also spends a lot of time thinking about other people’s guilt. She has to decide whether traders who exchanged messages in chat rooms with names such as “The Bandits’ Club” and “The Mafia” were colluding to manipulate benchmarks in the $5.3 trillion-a-day currency market.

“I’m not sure whether you’re ever surprised any more by anything,” said McDermott, 45, sitting in a room at the FCA’s London headquarters in Canary Wharf normally used for interviewing witnesses in investigations. “I was surprised. I’m no longer surprised.”

McDermott, who took over as enforcement chief in 2011, led the FCA’s investigation into the rigging of the London interbank offered rate, or Libor, resulting in the agency’s largest fine ever, a 160 million-pound ($269 million) penalty meted out to Zurich-based UBS AG. Now she’s playing a similar role in the burgeoning probe of foreign-exchange traders.

Currency Probe

Whatever she does, it will have widespread implications. Since the FCA became the first agency to announce it was looking into allegations that dealers shared information on client orders with counterparts at other banks and timed trades to influence prices, more than a dozen investigations have been opened on three continents. At least 30 traders from 11 firms have been fired, suspended, put on leave or retired.

“The working assumption is that, however complex, difficult and resource-intensive the Libor investigations have been, forex will exceed those challenges,” said David Kirk, a former FCA chief criminal counsel and now a London-based partner at U.S. law firm McGuireWoods LLP. “For Tracey, ensuring that the FCA takes the right action will be a large part of the job for some years to come.”

McDermott, who grew up in Yorkshire and earned a law degree from Queen Mary University of London, left a partnership-track job at Dechert LLP to join what was then called the Financial Services Authority in 2001. Her salary as a director is between 151,000 pounds and 281,000 pounds, with a potential 30 percent bonus, according to a pay guide in the agency’s employee handbook. That’s considerably less than the $1.49 million she could have made last year had she become a partner, a report on the law firm’s website detailing average compensation shows.

“I did take a pay cut to come here,” she said. “From my perspective, the money isn’t the object of why I do it.”

Bullet Points

Margaret Cole, who previously ran the enforcement division, earmarked McDermott as a possible successor early on, said two people with knowledge of the matter who asked not to be identified because the discussions were private. On the surface, the women have much in common.

“We’re similar in that we’ve both got very strong values rooted in northern, working-class upbringings,” said Cole, now general counsel for PricewaterhouseCoopers LLP U.K. “People joke that we’re both working-class, Catholic and horse lovers.”

While they both ride horses, the differences are more subtle. McDermott’s a more hands-on operator than Cole, according to the people, who have worked with both women.

“All enforcement lawyers would be familiar with the Tracey McDermott e-mail that said, in effect, ‘This is good, but I just have a couple of points,’ and there would be 10 bullet points, often more,” said Kirk, the former chief criminal counsel.

Dressage Tournament

Her attention to detail is evident as much in her horsemanship as in her investigative role. She keeps a black mare named Jazz at a stable in the grassy south London suburb of Wimbledon, where she practices dressage, a sport that requires leading a horse through a series of tests and prescribed moves. She spends about four hours a week there, often with her two daughters in tow, or riding through the city’s parks, according to Genna Bombardieri, a stable hand. McDermott won the winter dressage tournament at the stable two years ago.

“She’s very professional with a sense of humor,” Bombardieri said. “She always has something positive to say, even if an exercise doesn’t go 100 percent to plan.”

Right now, things are going according to plan. McDermott has increased the fines levied by the FCA and encouraged more whistle-blowers to come forward.

Silver Blaze

Total penalties last year, including 137 million pounds paid by JPMorgan Chase & Co. for its handling of the London Whale trading loss, topped 474 million pounds, 52 percent more than in 2012 and the highest in the regulator’s history. The FCA has imposed fines on six financial firms for manipulating Libor benchmarks and published warning notices for seven individuals. More penalties are planned against companies and traders, according to a person with knowledge of the matter.

The number of whistle-blower calls to the agency increased 23 percent in the 12-month period ending Aug. 31 compared with the year-earlier period, according to research from London-based law firm RPC LLP. The FCA started looking into currency allegations after a whistle-blower contacted the agency, according to a person with knowledge of the situation.

McDermott has been critical in speeches of those who don’t speak up when they witness wrongdoing, comparing them to the dog that didn’t bark because it knew the thief in “Silver Blaze,” the Sherlock Holmes story about a racehorse that disappears.

Taking Responsibility

People “can end up veering and thinking actually it must be alright to do X and Y because everybody else does it and nobody says anything,” McDermott said in the interview. In Libor, “there was a whole bunch of people who knew exactly what they were doing, who may not have been involved themselves, but still didn’t think it was wrong enough” to come forward.

While McDermott has expressed an appetite to go after what she called “bigger fry” in a 2011 Bloomberg News interview, the FCA issued 40 percent fewer fines to senior bankers last year than it did in 2010, according to an RPC report last month. With more to lose and their reputations at stake, executives are willing to fight protracted legal battles, the firm said.

The introduction last year of the Banking Reform Act’s Senior Managers Regime, forcing executives to sign statements of responsibility, was a direct result of McDermott’s comments to lawmakers on the Treasury Select Committee, said Mark Garnier, a member of the Conservative Party on the panel.

‘Feeling Guilty’

She also has impressed her foreign counterparts.

“For me, Tracey stood out from the very beginning,” said Lanny Breuer, an assistant attorney general at the Justice Department’s criminal division until 2013. “Whether we were talking about Libor or other matters, she has a sophisticated and open approach. We had similar concerns and processes in dealing with issues.”

For McDermott, who once told a colleague it never occurred to her to Google her own name, appearances in front of the committee are among the worst aspects of her job.

“Going to the Treasury Select Committee is a bit of a challenge,” she said.

To get through the tough parts of her role, McDermott said she follows one rule: Only feel guilty about one thing a day. If she can’t make it home for dinner with her kids, she tries to be back for bedtime.

“If I’m feeling guilty about not spending time with the kids, I don’t feel guilty about not doing any exercise or drinking too much wine,” she said.

With 130 investigations to supervise and about 60 people looking into the rigging of foreign-exchange rates -- a probe that her boss, FCA Chief Executive Officer Martin Wheatley has said probably won’t be concluded this year -- McDermott should get plenty of practice managing her guilt.

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