BT’s Openreach division, which runs the UK’s broadband infrastructure, should become a distinct company within the BT group, according to regulator Ofcom.
The media watchdog has resisted calls from BT’s competitors to split Openreach off entirely.
Instead, Ofcom said its plans would ensure the most independence from BT without the costs of a full separation.
The changes will help get faster, more reliable broadband to more people, Ofcom boss Sharon White told the BBC.
BT’s Openreach should be a legally separate company with its own board, branding and control over its budget allocation, Ofcom ruled.
BT chief executive Gavin Patterson said Ofcom’s report was a “sensible way forward” and accepted broadband services could be “better”.
Shares in BT have risen more than 3% on the news. Mr Patterson told the BBC that investors were “relieved that structural separation has been taken off the table”.
However, rivals warned the new rules would be complicated and still leave Openreach’s budget ultimately in the hands of BT.
“In taking one cautious step forward, I fear Ofcom has accidentally taken five steps back,” Talk Talk chief executive Dido Harding said.
“Legal separation still means that we’ll all be pouring over a complex web of regulation and BT has proven itself expert at gaming the system,” she added.
Openreach runs the wires and cables for the UK’s telecoms network and its customers include Sky and Talk Talk, as well as BT.
The government said a full split of Openreach from BT still “remains an option”.
A Department for Culture, Media and Sport spokesman added that “a more independent Openreach is needed to benefit consumers”.
Ofcom boss Sharon White told the BBC that a full split looks “clean and simple on paper”, but “actually there are big practical challenges”.
The plans will make Openreach a legally separate company and “can be introduced within months”, rather than the years that a sell-off would involve, Ms White said.
“We need more fast fibre right to the doorstep,” she said. Take-up in the UK is only 2%, compared with 70% in Japan, she said.
Calling it the “biggest shake-up to Openreach in its 10-year history”, Ms White said the changes would ensure the broadband network is run in the interests of the UK not just BT.
“If BT doesn’t agree, we will use the rules and powers to enforce the change,” she added. “We have the powers, we’re clear we have the powers.”
‘Feet to the fire’
The regulator will now consult on its plans until 4 October.
Jeremy Darroch, chief executive of Sky, said: “We are encouraged by Ofcom’s stated commitment and willingness to use its powers to hold BT’s feet to the fire.”
The plans come after MPs last week criticised the quality of service offered by Openreach, and said BT must put its “house in order”.
Lawmakers argued the firm should be broken up unless BT pumped more investment into the vital infrastructure.