The problem with government regulation is not that it's wrong to have a third party act as a neutral arbitrator, watchdog, or guarantor of safety, quality and effectiveness. All of those things are absolutely necessary. To have a business that regulates itself is a conflict of interest.
No, the problem is that the state has a monopoly on the regulation of commerce. And that doesn't work for several reasons. One is because that also is a conflict of interest, for the same reason that having a private business regulate itself is a conflict of interest.
Who will regulate the regulators themselves? There is no transitive closure to that question.
"If an agency is the ultimate judge in every case of conflict, then it is also judge in all conflicts involving itself. Consequently, instead of merely preventing and resolving conflict, a monopolist of ultimate decision making will also cause and provoke conflict in order to settle it to his own advantage. That is, if one can only appeal to the state for justice, justice will be perverted in the favor of the state, constitutions and supreme courts notwithstanding." ~ Hans-Hermann Hoppe
Another reason is because a monopoly watchdog is a single point of failure, and a single high-value target for corruption.
"If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?" ~ Bastiat
The problem with the state -- which is organized power that claims and violently enforces a monopoly on the use of coercive force and the provision of governmental services -- is the same problem that arises with any hierarchically-organized power structure. And it's the same problem that arises when any person or group has a monopoly. And it's the same problem that arises when any human attains power. We have met the enemy, and he is us--human beings:
"If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself." ~ James Madison
You cannot solve the problem of wrongful use of power by creating hierarchical power structures that concentrate power at the top of the hierarchy. Even if one initially installs people of perfect integrity in such positions of power, they will not remain in office forever. Eventually, those who would seek to corrupt the system to their advantage will succeed. And they are likely to be the rich and powerful:
"When under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices. Now, is it the most unfortunate who gains from this struggle? Certainly not, but rather the most influential and calculating." -- Frederic Bastiat
And finally, a monopoly regulator is effectively a central planner. And central planning does not work, because it cannot solve the Economic Calculation Problem: => http://en.wikipedia.org/wiki/Economic_calculation_problem