I wouldn't want a government to regulate martial arts. That should be done on an IF level. You alluded to a major problem in martial arts training. Large classes. If the class is too big for the instructor to know the skill levels of his students, thus pairing them up accordingly (with specific advice on what each one of them should work on), most students aren't getting proper martial arts training.
The school I was in was subject to commercialization, but at the same time it offered proper training for people who set higher standards for themselves. Having to bow whenever addressing a 9-yearold just b/c he had a black belt still irked me though lol.