You will need a longer line AND your line is WAY too big! You want a 5 to 6 foot piece of 3/16" ID beer line to provide the proper restriction. 5/16" line will flow WAY too fast and the beer will rocket out of the tap!
The hole on the regulator normally vents when you turn down the pressure, but should not be 'leaking' if you are not making pressure adjustments - if it is, you likely need a new diaphragm and or other internal parts, or you can just replace the regulator.
