The current U.S. system of consumer financial protection is designed to fail and needs replacement with a dedicated new agency that can respond more quickly to emerging problems in the financial sector, a senior U.S. Treasury official said on Tuesday.

Michael Barr, the Treasury's assistant secretary for financial institution, told lawmakers the current system, with consumer protection fragmented among several competing regulatory bodies, welcomes bad actors and irresponsible practices, dragging down standards.

The present system of consumer protection regulation is not designed to be independent or accountable, effective, or balanced. It is designed to fail, Barr told the U.S. Senate Banking Committee. It is simply incapable of earning and keeping the trust of responsible consumers and providers.

Barr was testifying to sell lawmakers on the Obama administration's proposal to consolidate consumer financial protection functions into a single agency.

The new regulator would take over these functions -- including personnel and bank fees to support it -- from existing banking regulators, including the Federal Reserve and the Office of the Comptroller of the currency.

The proposed agency is part of a sweeping Obama administration plan to revamp financial regulation in the wake of the worst financial crisis since the 1930s Great Depression. Key committees in the Senate and House of Representatives are now working on their own versions of the legislation.

Barr said the agency would be able to develop much faster supervisory guidance in response to emerging problems in the financial sector. Currently, diverse agencies must recognize problems and agree on corrective language, a laborious process that can take years.

In addition to strengthening mortgage standards, Barr said that payday loans, cash advances on credit cards and overdraft protection programs and fees were areas that needed more uniform disclosure and standards.

The only real solution to these flaws is creating an agency with a focused consumer protection mission; comprehensive jurisdiction over all financial services providers, both banks and non-banks; and the full range of regulatory, enforcement and supervisory authorities, Barr said.

(Reporting by David Lawder, editing by W Smon)