Ofcom proceeding with legal separation of Openreach and BT

Ofcom said it had been unable to reach agreement with BT on "the level of influence that BT Group executives could exert over the management of Openreach", as well as the transfer of people and assets.

The regulator has notified the European Commission of its intention to proceed with the plans (1-page / 230KB PDF), which would require Openreach to become a wholly-owned subsidiary with its own board within the broader BT group. It will publish detailed plans for consultation in the new year, which will then be submitted to the Commission for approval.

Ofcom will "remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns" throughout the consultation process, according to its announcement. However, it intends to implement the final reforms as quickly as possible following Commission approval, "so the UK can benefit as soon as possible".

Openreach is the division of BT that provides network connection and maintenance services to BT and many of its rivals. Ofcom believes that the current situation gives BT "the incentive and ability to favour its own retail business when making strategic decisions about new network investments by Openreach".

Ofcom published its proposals for addressing its competition concerns in July, along with BT's plans for doing the same. Feedback on both sets of these proposals called for the structural separation of Openreach but also raised concerns about the potential financial impact of doing so, particularly on BT's pension scheme.

By proceeding with "an effective and robust form of legal separation", Ofcom believes it can "achieve the greatest improvements for everyone in the shortest amount of time". However, it has not ruled out fully breaking up the two companies at a later date if legal separation does not go on to deliver "sufficient benefits for the wider telecoms industry and its customers".

Ofcom's proposal would require Openreach to become a distinct company with its own independent board. The chair, and the majority of non-executive directors on that board, could not be affiliated with BT. Openreach would have to be guaranteed greater independence when making decisions on strategic investments, and would be subject to a new duty to treat all of its customers equally, according to the proposal.

Once in force, the new arrangement would be publicly scrutinised and monitored by Ofcom to ensure Openreach's continuing independence. Monitoring would be based on "several measures of success", the most important of which would be whether board's decisions were genuinely independent and taken without influence from the wider BT group.

Earlier this week, BT announced that it had appointed former Ofcom board member Mike McTighe as the first chair of Openreach. A full Openreach board will operate from early 2017, as part of the company's plans to make the division "more independent and transparent". The board will be accountable for "setting the strategy and overseeing and managing the performance of Openreach", reporting to Openreach chief executive Clive Selley, according to BT's announcement.