Ofcom has ordered BT to separate from its Openreach network, which maintains the UK's broadband infrastructure, as part of plans to improve broadband and telephone services across the UK.
The regulator said voluntary proposals put forward by BT failed to "address our competition concerns", and ordered a legal separation – though, Openreach will still be a wholly-owned subsidiary of BT.
However, if this approach fails, Ofcom said a full split would be considered.
Related: What is Openreach?
“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,” Ofcom said.
The regulator is preparing a formal notification to the European Commission to begin the separation process.
Openreach oversees the UK's main telecoms network, which is used by BT, but also rivals including Sky and Vodafone.
Rivals such as this, along with other campaigners, have long called for the full separation of Openreach and BT, saying the latter gained a major advantage when it came to offering services to customers due to the fact it owned the fixed line network.
The creation of Openreach in 2006 was designed to provide equal access to BT’s local access network (LAN), which connects homes and businesses to telephone exchanges, so that rival companies could use the network to provide their own services.
But a report earlier this year found that "Openreach still has an incentive to make decisions in the interests of BT, rather than BT's competitors, which can lead to competition problems."
As a result, Openreach was told to open up its telegraph poles and 'ducts' - the underground tunnels that carry phone lines - to rival broadband providers.
Now, following Ofcom's latest ruling, Openreach will become a distinct company with its own board made up of independent directors.
The move to split the two companies follows a consultation in the summer, which Ofcom said highlighted slow broadband speeds, and concerns over high-speed fibre broadband availability and service quality from other companies.
It also comes despite BT appointing a chairman for Openreach, Mike McTighe, in an effort to bolster the subsidiary's independence.
Ofcom said it is still "open to BT bridging the gap between its proposal and what is required to address our strong competition concerns".
WATCH: Trusted Explains: How to improve your Wi-Fi signal
Let us know your thoughts on Ofcom's decision in the comments.