The NSW Ombudsman Act requires "public authorities" – including councils – to tell the Ombudsman's office of "reportable allegations" involving staff.
However, this requirement does not apply when a contractor operates a pool in the name of a council or similar.
Child safety expert and managing director of Child Safeguard Marco Blanco said that the loophole must close.
"Swim Centers are not facing the same regulations as other sports, it's an area that can have higher risks but less regulation," he said.
"Often there is a gap when a private operator runs a swim program in a council pool. Councils have very controlled policies, and from our experience a lot of policies from local government are drafted with early childhood centers in mind – those policies don ' t necessarily address specific risks in an aquatic environment. "
Mr Daniels' Barrister Todd Alexis told the Manly Local Court that the "inappropriate hold" complaint did not necessarily relate to the alleged sexual assault of eight of the students he was supposed to teach to swim.
"It's pretty obvious that what we're dealing with here is allegedly inappropriate touching," Magistrate Daniel Reiss replied.
Mr Daniels strenuously denies the allegations.
Parents say the swim school's decision to retain the casual teacher after the first complaint led them to withdraw their children from lessons.
"Finding out that concerns had been reported to the school months ago and they kept him on, that's why we left," said one mother, whose three children had previously been enrolled at the Mosman Swim Center.
Sally Rawsthorne is a Crime Reporter for The Sydney Morning Herald.