Ofcom has announced that it will order the legal separation of BT Openreach from the main business after BT failed to address competition concerns.
Ofcom's decision, though, means it has fallen short of ordering a full break-up of the business from BT, which is what rivals such as Sky and TalkTalk had wanted.
Ofcom, which earlier this year called for Openreach to be loosened from BT, said that following a public consultation it has decided to call for a legal separation of the two companies after BT failed to address Ofcom's competition concerns with its voluntary proposals in July.
"We are disappointed that BT has not yet come forward with proposals that meet our competition concerns," Ofcom said.
"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.
Ofcom said that BT's proposals fell short on "the transfer of people and assets, and the level of influence that BT Group executives could exert over the management of Openreach".
"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."
However, the watchdog has warned that if this measure is not successful in "delivering sufficient benefits for the wider telecoms industry and its customers", it will consider a full split of the companies.
It said it would notify the European Commission (EC) of its intention to begin proceedings to separate the two entities.
In response BT said it maintains that its proposals put forward in July "are fair and sustainable" and noted that it has just appointed its first chairman of Openreach as part of its efforts to give the unit more independence.
"We are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach CEO and the form of legal incorporation," it added.
"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.”
Kester Mann, principle analyst at CCS Insight said that BT rivals may be disappointed Ofcom has not called for a complete split, but that they should be pleased with the way the situation is progressing.
“Steering clear of a structural split is unsurprising. This would have been the most controversial and costly action Ofcom could have taken, but would still not have offered guaranteed improvements for customers," he said.
“No doubt, BT’s rivals will criticise Ofcom for not being brave enough to push for structural separation. But after many months of campaigning, they should see the regulator’s efforts to engage with Brussels as a partial victory.
"The move toward legal separation and greater independence will bring important benefits to companies like Sky and TalkTalk in the long-term."
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