Ofcom has ordered the legal separation of BT and Openreach, after the UK telecoms regulator failed to gain assurances from BT addressing the competition concerns it raised in July.
Ofcom said it is preparing to notify the European Commission of its intention to force the separation, which will make Openreach a distinct company within the BT group.
The proposal falls short of demands set out by the Fix Britain’s Internet campaign, which has invited UK broadband customers to voice their concerns about BT’s wholesale business structure as part of the public consultation that followed Ofcom’s announcement in July.
Three UK was the latest operator to join the campaign in September.
Ofcom said in a statement: “Our current view is still that an effective and robust form of legal separation, with Openreach as a wholly-owned subsidiary of BT, is likely to achieve the greatest improvements for everyone in the shortest amount of time.”
BT’s proposals have fallen short in certain areas, said Ofcom, including the transfer of people and assets, and the level of influence BT executives could exert over the management of Openreach.
“We are disappointed that BT has not yet come forward with proposals that meet our competition concerns. Some progress has been made, but this has not been enough, and action is required now to deliver better outcomes for phone and broadband users,” it said.
BT said: "We are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach CEO and the form of legal incorporation.
"We will continue to work with Ofcom to reach a voluntary settlement that is good for customers, shareholders, employees, pensioners and investment in the UK’s digital future.”
The separation will see Openreach appoint a new board. Most non-executive directors are currently affiliated with BT also, including its Chair.
In parallel, Openreach announced it had appointed Mike McTighe, a former Ofcom board member, as its first independent Chairman.
McTighe starts in January, when the new Openreach board begins work, in accordance with the governance changes it outlined in July in response to Ofcom’s report.
Sir Michael Rake, Chairman at BT, said: “We promised in July to create an Openreach Board and we are delivering on that promise. I remain hopeful this significant move by BT can help to underpin a sustainable, proportionate and fair regulatory settlement that is in the interests of the whole country.”
The move has not swayed Ofcom, which said its final proposal will ensure Openreach has greater independence on strategic investments, with a duty to treat all of its customers equally.
Ofcom will “publicly scrutinise and monitor” the results of the separation, and specifically that board decisions are taken independently.
“If Ofcom’s monitoring suggests that legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, we will return to the question of structural separation – fully breaking up the companies,” said Ofcom.
Ofcom said 94,000 people responded to its consultation via an online campaign, with most coming from the Fix Britain’s Internet campaign, requesting a full structural separation.
It said structural separation could generate greater costs and risks, compared to legal separation, including the effects on BT’s pension scheme.
However, it advises concerns about pensions raised by BT and trade unions have been “overstated”.
Equally, Ofcom said more extreme views about a full break-up can be met with an “enhanced” version of its proposed legal separation.
“Structural separation is the most intrusive form of regulatory intervention available,” it said.
There was no detail in the press statement about such enhancements to original proposal.
McTighe said of his appointment: “A great deal has been achieved over the past decade but it is clear that Openreach needs to up its game on service and regain the trust of the people we serve in the industry and across the UK.”