Ofcom decide to force legal separation of Openreach

29 November 2016, 21:24   By Samantha Smith

OFCOM have decided to force the legal separation of Openreach from BT, after BT were unable to "offer voluntary proposals that address [their] competition concerns".

ofcom mobile phone
Source: Ofcom

Legal separation will mean that Openreach becomes a legally independent subsidiary of BT, with their own board comprising "a majority of non-executive directors ... who are not affiliated with BT".

According to Ofcom, such an arrangement will ensure that Openreach treats all their ISP customers equally, and won't simply act and invest in a way that's more advantageous to BT than to other retail broadband providers.

Yet because Openreach will remain under BT ownership even when legally separated, there's a genuine concern they might still end up working more to BT's favour on the whole, even if Ofcom have vowed to "monitor" Openreach's progress.

Budgetary constraints

The BT-Openreach Saga
Ofcom recommend legal separation
Could Openreach be split from BT?
Home broadband: a market overview
Digital Minister calls for full-fibre broadband

Unsurprisingly, this is what BT's rivals have suggested, with TalkTalk's Dido Harding in particular treating Ofcom's decision with a liberal dose of scepticism.

She admitted, "we do not think legal separation goes far enough to deliver the broadband consumers deserve", implying that the reforms may not produce "meaningful improvements" and "major changes" to how Openreach operate.

While they didn't go as far in their scepticism, Sky expressed similar reservations when they said, "We will now watch closely as to how Ofcom executes its proposals".

Given that BT will still have control over Openreach's total budget, there undoubtedly remains a need to watch things closely.

As written in Ofcom's original plans from July, BT Group would still provide Openreach with "a set spending capacity" under legal separation.

Even though this separation will, in theory, give Openreach the ability to spend their allocated budget however they so wish, they'll still need to "make recommendations to the BT Group Board for increased spending".

As a result, their ability to obtain extra money will depend on whether their parent company are happy with them spending additional funding in the way they outline.

In other words, their spending still needs to be approved by BT, albeit in a more roundabout and indirect way.

Appointments and part-nationalisation

Added to this, even though Openreach will soon have their own board, the non-executive majority of this board will "be appointed and removed by BT".

There's therefore a possibility that, when it comes to whose interests they have closest to heart, they may be vulnerable to some slight preference for the people who've hired and can fire them.

And this preference could make itself felt in their choice of executives, who aren't supposed to be accountable to BT but who will, it seems, be selected by people who more or less are.

Still, in opposition to this pessimism it has to be said that "Ofcom must be consulted on - and approve - each appointment and removal".

This will hopefully ensure that any potential biases will be kept in check, even if it appears to go the unusual step of making Ofcom a de facto member of the Openreach board, at least when it comes to appointments.

The Sword of Damocles

Broadband guides
Is BT broadband, phone and TV any good?
Sky or Virgin: which is better ?
Hyperoptic go live
Who is the fastest broadband provider?

Yet an even greater defence against bias and favouritism is simply provided by Ofcom's threat that they'll "return to the question of structural separation - fully breaking up the companies" if the current reforms don't make Openreach more impartial and the broadband industry more competitive.

And since the regulator have indeed taken the dramatic step of legally separating Openreach from BT, the threat of a full, structural separation now appears much more credible.

It may prove enough to motivate Openreach to remain fair in their dealings with every UK ISP served by their network, and it may prove enough to prevent BT from trying to exert any undue pressure on their subsidiary.

And if it's not quite enough on its own, Ofcom's assurance that they'll "publicly scrutinise and monitor... whether Openreach Board decisions are taken independently" will provide it with added impetus.

Taken together, these measures should help to increase the competitiveness of the broadband market, guarding against such injustices as Openreach overcharging BT's rivals for repairs, as they were found to have done by Ofcom earlier this year.

Of course, legal separation may not be what these rivals wanted, yet Ofcom appears to have made the best possible compromise, especially since it avoids having BT's funding pulled out from under Openreach's feet.

At a time when the Government are striving to improve the UK's digital economy in the face of the uncertainty of Brexit, this financing is arguably needed more than ever to prevent yet more instability.

This is why Ofcom's latest intervention represents probably the best possible decision under the current circumstances. And coupled with the Advertising Standards Authority's recent rulings on pricing and speeds in advertisements, it just might mean that customers find their broadband getting better in the long run.

Which broadband deals are available in your area?

independent comparison

We are independent of all of the products and services we compare.

fair comparison

We order our comparison tables by price or feature and never by referral revenue.

charity donations

We donate at least 5% of our profits to charity, and we aim to be climate positive.

Get insider tips and the latest offers in our newsletter