BT has bowed to demands by the telecoms regulator Ofcom to legally separate Openreach, which runs the UK’s broadband infrastructure.
Ofcom said that Openreach will become a distinct company with its own staff, management and strategy “to serve all of its customers equally”.
It must consult with customers such as Sky and TalkTalk on major investments.
Ofcom boss Sharon White told BBC Radio 4’s Today programme that “we can now expect better service from Openreach”.
The regulator had threatened to force BT to legally separate Openreach.
However, Ofcom said on Friday that the company had agreed to all of the changes needed to address its competition concerns.
“As a result, Ofcom will no longer need to impose these changes through regulation. The reforms have been designed to begin this year.”
BT’s rivals such as Sky, TalkTalk and Vodafone, which use Openreach’s network to offer broadband to consumers, have long complained of high charges, poor service and failure to invest in the division.
Ms White called it a “significant day” for phone and broadband users and pledged to “carefully monitor” how the revamped Openreach performs.
BT chief executive Gavin Patterson said the deal, reached after two years of negotiations with Ofcom, meant Openreach would have its own board and make its own investment decisions. However, he admitted that BT would set the overall budget.
He told BBC Radio 4’s Today programme: “The BT board will set the annual budget. As the 100% shareholder, the owner of the company that’s not unreasonable.”
Under the agreement, Openreach chief executive Clive Selley will report to its chairman, Mike McTighe. However, the boss will still have to report to Mr Patterson on legal, fiduciary and regulatory issues.
BT’s chief executive can veto the appointment of Openreach’s boss, but only after notifying Ofcom.
Openreach’s 32,000 staff will transfer from BT to allow the new business to “develop its own distinct organisational culture”.
Mr Patterson said the agreement would end a “period of uncertainty” for staff. “We have listened to criticism of our business and as a result are willing to make fundamental changes to the way Openreach will work in the future,” he said.
He also admitted that Openreach’s service has “not been where it needed to be” and said the separation would improve the situation.
The BT logo will also be removed from Openreach’s branding.
Sky welcomed the announcement: “A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs. It’s important that today’s agreement is now implemented by BT in good faith and without delay.”
Shares in BT jumped 4.6% to 345.6p in morning trading in London.