Creating a more independent Openreach is an important part improving broadband quality, the regulator said: "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."
Earlier this year Ofcom set out its competition concerns: that BT has the incentive and ability to favour its own retail business when making decisions about new network investments by Openreach.
Ofcom's proposal requires Openreach to become a distinct company with its own board with a majority of non-executive directors, including the chair, who are not affiliated with BT. Ofcom said it is now preparing to notify the European Commission of its intention to implement these plans.
"Throughout this process, we remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns," the communications watchdog said.
Ofcom said it had "considered carefully" the calls for the structural separation of Openreach, which would split BT and Openreach into two entirely separate companies, under different ownership, but said its 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".
But it warned: "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." The regulator said that BT's response to the proposals had not gone far enough.
"BT has so far failed to offer proposals that would adequately address our concerns. BT's proposals still fall short in important areas. These include the transfer of people and assets, and the level of influence that BT Group executives could exert over the management of Openreach."
BT said the proposals it put forward in July were "fair and sustainable" and could "meet Ofcom's objectives without disproportionate costs".
However, this is unlikely to be the end of the saga, according to analyst house Ovum. "This announcement will undoubtedly come as a blow to BT, which thought it was making progress with Ofcom; however, the door remains open for both sides to reach a voluntary agreement. In many ways, a voluntary agreement remains a better outcome than a forced legal separation, not least because the EU route is uncertain, untested, and likely to take much longer to achieve. It is also made more complex by the decision from the UK to leave the EU," it said in a statement.
And Fiona Keenan, strategic insight director at Kantar Worldpanel, said the decision was welcome: "Today's decision from Ofcom is certainly a step change for the UK telecoms market. The proposed reforms should go far in fostering a more consultative, transparent approach to infrastructure development, as well as increasing investment. It should also suppress concerns from other providers who have always felt that BT's control over Openreach has stymied their growth.
But she said the UK broadband market is constrained by bigger issues than Openreach's ties to BT: "The likes of Sky and TalkTalk have long been using the problematic status of Openreach as a free pass to explain their own shortcomings, but that's not the whole story. Whether ultimately we'll see cheaper and faster broadband for the general public remains to be seen."