Openreach to legally separate from BT

The largest reform in Openreach's history has been confirmed, after BT agreed to Ofcom's requirements for Openreach to become a legally separate company within the BT Group.

Openreach is the part of the BT Group that maintains and develops the telecoms network used by telephone and broadband providers in the UK. It is under obligations to offer the same products to all such providers on the same terms. As part of Ofcom's Digital Communications Review, in February 2016, it set out its concern that the existing model of functional separation failed to remove BT's ability to discriminate against competitors. Whilst Ofcom introduced this structure in 2005 and it had delivered benefits from a competition perspective, Ofcom was particularly concerned that BT still retained influence over important Openreach decisions. The regulator first suggested the legal separation of Openreach in its July 2016 consultation as part of its proposed model for reforms to make Openreach more independent. Ofcom then announced its intention to formally require the legal separation in November 2016, after BT failed to voluntarily address Ofcom's competition concerns.

Most recently, on 10 March 2017, BT agreed to the legal separation of Openreach and set out its commitments in a formal notice to Ofcom under section 89C Communications Act 2003. BT agreed to all of the changes needed to address Ofcom's competition concerns and Ofcom will no longer need to impose these changes through regulation. The regulator has also stated that the changes will allow Openreach to achieve independence from BT, without the delays and disruption associated with structural separation or a sell-off to new shareholders. Set to commence this year, the key changes include:

• Distinct company: Openreach will be incorporated as a legally separate company within the BT Group, with its own Articles of Association. Openreach and its directors will be legally required to make decisions in the interests of all Openreach customers and to promote the success of the company.
• Openreach Board: The recently established Openreach Board (which has a majority of directors that are independent from BT) will be responsible for running Openreach under a new governance agreement.
• Executive accountability: Openreach's CEO will: (i) report to the Openreach Chair; (ii) have secondary accountability to the BT Group Chief Executive in respect of certain legal, fiduciary and regulatory obligations; and (iii) in future be appointed by and accountable to the Openreach Board.
• Separate strategy: Openreach will develop its own strategy and annual operating plans within an overall budget set by the BT Group.
• Control of assets: Whilst Openreach will have control over the building and maintenance of the assets required to deliver on its purpose (e.g. the physical access network), ownership of those assets will remain with the BT Group.
• Openreach staff: Around 32,000 employees will be transferred from the BT Group to Openreach to allow Openreach to develop its own distinct organisational culture.
• Consultation for Openreach customers: Openreach will be obliged to consult formally with its customers (e.g. Sky, TalkTalk and Vodafone) on large-scale investments, which will include a confidential phase where the contents of discussions will not be disclosed to the BT Group.
• Separate branding: "BT" will be removed from Openreach's branding.

In addition, on 17 March 2017, Ofcom published a related consultation "Delivering a more independent Openreach" which included further details on how BT's commitments address the regulator's competition concerns and how Ofcom intends to monitor and enforce the new arrangement. The consultation will close on 14 April 2017, following which Ofcom plans to publish a statement in May 2017.

In a separate Ofcom investigation into Openreach, on 26 March 2017, Ofcom imposed a £42 million fine on BT for misusing the terms of its contracts to reduce compensation payable to other telecoms providers. Under Ofcom rules intended to promote competition, BT is obliged to install Ethernet services to wholesale customers in accordance with its contracts – which require it to deliver those services within 30 working days or pay compensation for late delivery. BT will also be fined £300,000 for failing to provide accurate and complete information to Ofcom during the course of the investigation.

Click here to access the Ofcom statement 10 March 2017.

Click here to access the Ofcom statement 17 March 2017.

Click here to access the Ofcom statement 26 March 2017.