Speaking on the BBC’s Radio 4 Today programme, Chancellor George Osborne described McDermott as a ‘very effective interim leader’ but said she didn’t want the job in the long term.
McDermott had been tipped as the front runner to take the top spot in reports earlier this week.
Osborne said the search continued for the ‘very best candidate’. Today presenter John Humphrys criticised Osborne for removing the former chief executive Martin Wheatley from his position and leaving the regulator leaderless.
Humphry said that Osborne had ousted the man ‘whom many bankers seriously feared’ and had given the banking sector a ‘free run’.
Wheatley resigned in July 2015 after Osborne refused to renew his FCA board membership beyond the end of January 2016. He stood down from his position in September with the frank disclosure that he was disappointed to be leaving the role.
Osborne said he did not accept that his decision to remove Wheatley had made life easier for the banks. He praised Wheatley for doing a good job setting up the FCA, but said the organisation needed new leadership as it entered its more mature phase.
The FCA’s move to drop its industry-wide enquiry into banks’ behaviour, a decision which emerged last month, in favour of an individual approach, has been described as ‘odd’ by Andrew Tyrie, chairman of the Treasury Select Committee.
Osborne said he had no foreknowledge that McDermott had decided to drop the banking probe and it was an independent decision taken by the regulator.
McDermott and chairman of the FCA John Griffith-Jones will now face questions on their decision to drop the probe when they stand before the committee.