The telecoms giant has faced calls for Openreach to be split off from the rest of the company but Ofcom has fallen short of recommending a sell-off.
In a report released on Tuesday, Ofcom instead proposes major reform of the division of BT that develops and maintains the UK’s main telecoms network used by telephone and broadband providers such as Sky, TalkTalk, Vodafone and BT Consumer.
The proposals include making Openreach a distinct company with its own board, including a majority of non-executive directors not affiliated to BT Group.
It also proposes greater consultation with customers on large-scale investments, its own staff working for Openreach, ownership of assets that it already controls, its own strategy and control over budget allocation, and independent branding.
Sharon White, Ofcom chief executive, said: “We’re pressing ahead with the biggest shake-up of telecoms in a decade, to make sure the market is delivering the best possible services for people and business across the UK.”
The current structure of BT was introduced by Ofcom in 2005.
But the watchdog said that although it has delivered benefits such as stronger competition, it means BT retains influence over significant Openreach decisions and has an incentive to make these decisions in the interests of its own retail businesses, rather than competitors.
Ofcom, which is seeking views on the plans by 4 October, said the new model “would provide Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption - to industry and consumers - associated with separating the companies entirely”.
The proposals come a week after MPs said that if BT does not ramp up investment in Openreach and address poor service, Ofcom should force it to split off the division.
BT - which now also owns mobile phone group EE - has pledged to spend £6 billion over the next three years and overhaul customer service to see off the threat of a forced split.
But a scathing report from the Culture, Media and Sport Select Committee last week claimed BT has “significantly under-invested” in Openreach, which is responsible for rolling out super-fast broadband across the UK.
And the MPs accused BT of making strategic decisions that put the group’s interests ahead of customers and its Openreach business.
The report found that, based on information from a panel of independent experts, BT’s under-investment could potentially run to hundreds of millions of pounds each year.
The report said BT was “exploiting the position of vertical integration to make strategic decisions that favour the group’s priorities and interests, at the expense of its access infrastructure business”.
It added that BT “appears to be deliberately investing in higher-risk, higher-return assets such as media properties, and not investing in profitable lower-risk infrastructure and services through Openreach”.
The report also claimed BT had “stifled local competition and thwarted other network providers’ planning” through its lack of transparency on Openreach costs.
Ofcom likewise came under fire in the report, with MPs saying it was “slow to introduce minimum service standards with financial penalties for Openreach, some nine years after its creation”.
MPs said tougher penalties for poor service would encourage BT to invest more in Openreach.
Rival companies such as Sky, Vodafone and TalkTalk have long called for a split between BT and Openreach.
They pay to use the network and have previously complained over poor service and urged the group to replace its ageing network of copper wire.
Ofcom chief executive Sharon White said there was a gap between what the regulator and BT are proposing and stressed she would use her powers to enforce the change if the company resists it.
She told the BBC Radio 4 Today programme: “I understand why some people look at selling off Openreach. It looks simple and clean on paper; actually there are big practical obstacles in terms of thousands of land contracts that need to be renegotiated, big pension changes, and I don’t think the country can afford to wait for reform.
“That’s why today we have announced the biggest shake-up to Openreach in its 10-year history to deliver better broadband to UK homes and businesses.
“Openreach will become a distinct company, legally separate from the rest of BT; it will have its own board, obliged by law to act in the interest of all customers, not just BT; and it will have to consult on big investments that matter to the UK, like fast fibre to the doorstep, not just what BT wants.”
Ms White insisted the move would make a “significant” difference to customers.
“It will mean that we have faster, more reliable broadband,” she said.
“It will mean that engineers turn up on time, get the job done first time.
“And I think also, crucially for the UK, it will mean more investment in fast fibre to the doorstep.”
The Government welcomed Ofcom’s recommendations, saying BT’s own proposals were inadequate.
A Department for Culture, Media and Sport spokesman said: “Nine out of 10 homes and businesses now have access to superfast broadband, but our goal is to make sure the UK builds the right infrastructure to maintain our position as a world-leading digital nation.
“We are clear that a more independent Openreach is needed to benefit consumers and the UK’s digital infrastructure. We are concerned that BT’s proposals do not go far enough and think it is right that full structural separation remains an option.
“Swift and clear action is needed to give certainty to consumers, industry and investors in the UK’s broadband infrastructure, and which delivers rapid improvements in the level of investment and service.”