Ofcom has ordered BT to give more independence and investment powers to its broadband subsidiary Openreach.
According to the regulator, Openreach should be a distinct and legally separate company with its own board.
Ofcom also believes Openreach should own the assets it already controls and have a separate strategy and control over budget allocation.
In addition, the watchdog has proposed that Openreach be given its own independent branding that is not affiliated with BT Group, as this would help "embed the organisational culture of a distinct company".
Directors would be required to make decisions in the interests of all its customers and to promote the company's success.
Openreach must also carry out greater consultation with customers, with an obligation to consult formally on large-scale investments.
Staff would be employees of Openreach rather than BT Group to prevent any real or perceived conflict of interest and enable it to foster its own organisational culture.
Ofcom believes this model would give Openreach the greatest possible degree of independence from BT Group, while avoiding the costs and disruption to consumers and industry that would come with a full separation.
The watchdog also hopes that its proposals will make it easier for providers to roll out ultrafast fibre broadband networks to homes and businesses throughout the country.
Sharon White, Chief Executive of Ofcom, said: "We're pressing ahead with the biggest shake-up of telecoms in a decade, to make sure the market is delivering the best possible services for people and business across the UK."
Richard Neudegg, Head of Regulation at uSwitch.com, added: "A complete separation of Openreach and BT has been put on the back-burner - for now at least. The regulator has given it the chance to make improvements to avoid potentially losing Openreach forever. "Quite frankly, consumers - too many of whom are familiar with delays incurred by Openreach even when BT isn't their retail provider - don't care how it’s done. They just want and deserve a better service. "Too many of us don’t currently have the speeds necessary for a decent online experience. Despite the wide availability of fibre, we aren't yet seeing widespread take-up - 30 per cent of broadband users still register actual speeds of less than 5Mbps while just ten per cent are logging speeds above 50Mbps. "The broadband market is at a crossroads. The big question is how we achieve the right kind of competition and investment in the UK's broadband infrastructure - and a proposed re-structuring of BT Group doesn't answer that question by itself. “With today's proposals on more independence for Openreach within BT Group, Ofcom is trying to give the network-arm more incentive to invest its money in the right places and boost other providers’ ability to compete on more aspects of broadband service.
"BT Group needs to get on with delivering some progress, and fast. We've seen Ofcom and government state clearly if we don't see significant improvements, other options need to be considered."