Are the regulators not also individuals? In the real world, they are not a class of special, noble beings; they are also individuals with the same failings of which you speak, and their industry is not set apart from the laws of the universe under which all other industries exist.
Voluntary interaction provides the only fundamental regulation that is required: Bankruptcy. The only way a bad organization can sustain itself is through forced funding by involuntary interaction (that is, coercion). This is also true of regulatory agencies; like any other company, a regulatory agency should instead be founded on capitalism as a "private" company.
In particular, what is "Government"? Any organization—any organization at all—that confiscates resources by threat of strike-first violence is a "governmental" organization. When one such organization becomes a monopoly, we call that organization "Government".
Government inevitably becomes just another bad company in the market place, one that doesn't go out of business because it is able to confiscate your resources by threat of violence; it doesn't give you the goods and services for which you personally think you are paying, but you have to pay them anyway—it's totally absurd and unconscionable. It is not a modern value to coerce resources from people by threat of violence. So, in fact, Government is actually the last barbaric vestige of a pre-modern civilization.
Indeed, the easiest way for a company to secure its own funding by coercion is to employ a specialist, Government, to "legalize" bad behavior, or "regulate" competitors out of business, etc. The fundamental problem here is a foundation of coercion, which is itself fundamentally a lack of regulation (as per above).
You are correct in that the free market does not promise an immediate solution to every problem, particularly ones that are completely unforeseen. But that's not the point of the free market; rather, it's about allowing a solution to emerge organically over the long term through evolution by variation and selection. Even under relatively mindless influences, this is much more likely to yield sustainable results than an attempt at Intelligent Design—the fantasies of bureacrats—because an evolved solution is necessarily aligned with reality.