BT agrees to legal separation of Openreach

10 Mar 2017 12:52 PM

The biggest reform of Openreach in its history is set to conclude, after BT agreed to Ofcom’s requirements for the legal separation of its network division. 

• Openreach to become a distinct company with its own staff, management, purpose and strategy

This means Openreach will become a distinct company with its own staff and management, together with its own strategy and a legal purpose to serve all of its customers equally.

BT has agreed to all of the changes needed to address Ofcom’s 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.

To implement this agreement with the smallest possible effect on BT’s pension scheme, the existing Crown Guarantee would need to be maintained for Openreach staff who are members of BT’s pension scheme.1

The new Openreach will have the greatest degree of independence from BT Group possible without incurring the delays and disruption – to industry, consumers and investment plans – associated with structural separation or the sell-off of Openreach to new shareholders.

BT’s commitments, combined with regulation imposed by Ofcom through its regular market reviews, will form a comprehensive solution to problems in the market that Ofcom had identified.

How the new Openreach will work

• Openreach will become a distinct company. Openreach will be incorporated as a legally separate company within 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’s customers, and to promote the success of the company.
• The Openreach Board will run the company. The Openreach Board that BT has already established in recent weeks, which has a majority of directors independent of BT, will become the Board of the new company. It will be truly responsible for running Openreach, under a new governance agreement.
• A separate strategy and control over budget allocation. Openreach will develop its own strategy and annual operating plans, within an overall budget set by BT Group.
• Executives will be accountable to the new Board. Openreach’s Chief Executive will in future be appointed by, and accountable to, the Openreach Board. BT Group will be able to veto appointment of the Openreach CEO, but only on notification to Ofcom. The Openreach Chief Executive will then be responsible for other executive appointments, and will report to the Openreach Chair – with a secondary accountability to the Chief Executive of BT, limited to necessary legal, fiduciary or regulatory obligations.
• Staff will work for Openreach. The new Openreach will directly employ all its 32,000 staff, who will be transferred across from BT. This will allow Openreach to develop its own distinct organisational culture.
• Assets will be controlled by Openreach alone. Openreach will have control of those assets – such as the physical access network – required to deliver on its purpose. The Openreach Board will make decisions on building and maintaining these assets: BT will hand these powers to Openreach, while retaining a title of ownership.
• Consultation and confidentiality for Openreach’s customers. Openreach will be obliged to consult formally with customers such as Sky, TalkTalk and Vodafone on large-scale investments. In future, there will be a ‘confidential’ phase during which customers can discuss ideas without this being disclosed to BT Group, as well as further protections for confidential customer information.
• Distinct branding. BT will be removed from Openreach branding, to reflect these changes and the company’s greater independence.

The new model will be supported by careful, continual monitoring to ensure it is effective. As part of this, BT will provide Ofcom with additional transparency on the nature of interactions between the new Openreach and the rest of BT Group.

Sharon White, Ofcom Chief Executive, said: “This is a significant day for phone and broadband users. The new Openreach will be built to serve all its customers equally, working truly independently and taking investment decisions on behalf of the whole industry – not just BT.

“We welcome BT’s decision to make these reforms, which means they can be implemented much more quickly. We will carefully monitor how the new Openreach performs, while continuing our work to improve the quality of service offered by all telecoms companies.”

BT’s commitments also include reforms to how BT works in Northern Ireland, where Openreach does not operate. These will extend the benefits of the Openreach changes to BT Northern Ireland – including greater independence, confidentiality, and independent branding. BT Northern Ireland will also remain able to take account of specific local circumstances and opportunities.2

Why Openreach needs reform

Ofcom announced plans last year, as part of its Digital Communications Review, to overhaul Openreach’s governance and strengthen its independence from BT.

This followed our concerns that BT has retained control of Openreach’s decisions, while other telecoms companies have not been consulted sufficiently on investment plans that affect them.

Openreach reform is one part of Ofcom’s work to ensure that all providers meet the growing demands of customers. We are also finalising measures to ensure better value for customers who only take a landline; deliver automatic compensation for landline and broadband customers when things go wrong; and bring about faster fault repairs and installations by Openreach.

Next steps

BT has outlined its commitments in a formal notification to Ofcom.

Ofcom will shortly publish further detail on how today’s agreement addresses our competition concerns, together with proposals to release BT from its previous undertakings around Openreach once the new commitments are fully in place. At the same time, we will set out how we will monitor and enforce the new structure for Openreach.

NOTES TO EDITORS

1. The Crown Guarantee is a piece of legislation that ensures the Government would meet BT’s obligations to the BTPS in the unlikely event that the company should be wound up.

   To implement this agreement with the smallest possible effect on BT’s pension scheme, the existing Crown Guarantee would need to be maintained for Openreach staff who are members of BT’s pension scheme. The Crown Guarantee is important for maintaining the pension rights of members of the scheme. Maintaining the Crown Guarantee is a matter for Government, and requires a change to existing legislation.

2. Historically, Openreach has existed in Great Britain, but not in Northern Ireland. Instead, BT Northern Ireland has adapted its processes to closely reflect those of Openreach, an arrangement that has generally worked well. Ofcom wants to protect these benefits to Northern Ireland and strengthen the current arrangements to reflect today’s agreement.