Hi.
I don't why this worked for me or if it might even work for you, but what I did was locate the following file 'wpdmtp' in C:\Windows\INF.
I right-clicked on it and updated it.
Suddenly, my PC recognised my Lumia 535, even though if I try to update the driver I still get the same error.
Well, as long as my phone shows up, I don't really care. Hope that helps.