The U.S. government's fragmented system for protecting financial consumers is designed to fail and must be replaced by a single, powerful new agency, a senior U.S. Treasury official said on Tuesday.

In remarks meant to advance a key part of the Obama administration's sweeping financial regulation reform package, Treasury Assistant Secretary Michael Barr urged lawmakers to approve a proposed Consumer Financial Protection Agency.

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 a panel.

It is simply incapable of earning and keeping the trust of responsible consumers and providers, he said.

We have to have a fresh start with a new agency whose sole mission is standing up for the American people.

Barr met cautious support from Democrats in a Senate Banking Committee hearing, and resistance from some Republicans along lines of attack on the proposed consumer agency already being pursued by much of the financial services industry.

President Barack Obama last month unveiled a wide-ranging package of proposals to rewrite the rules for banks and capital markets in response to a severe financial crisis that has dragged down economies worldwide for more than a year.

Obama wants to enact new laws by the end of the year. His proposals are expected to move rapidly through the House of Representatives, where Democrats are in firm control, with the closely divided Senate likely to move more slowly.

This is a tremendous overreach ... This is way out of bounds, said Republican Senator Bob Corker at the hearing.

Senator Richard Shelby, the committee's top Republican, called the proposed new agency a radical departure.

The Consumer Financial Protection Agency (CFPA) would take over consumer protection duties on mortgages, credit cards, payday loans and other products. At present, more than 10 agencies, including the Federal Reserve, handle these issues.

Senate Banking Committee Chairman Christopher Dodd said the present system broke down in the crisis of recent months, marking a spectacular failure...Stronger consumer protection could have stopped this crisis before it started.

Dodd said, We are in a radical situation ... The classical model (of regulation) has fallen apart.

(Reporting by Kevin Drawbaugh and David Lawder; Editing by Andrea Ricci)

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