Telecoms regulator has sent a formal notification to BT, legally requiring the service provider to split from Openreach and that Openreach should become a distinct company within the BT group.
The watchdog said that BT had not voluntarily addressed competition concerns that it laid out in July. Ofcom said it was preparing a formal notification to the European Commission to start the process.
Rival companies had pushed Ofcom to split Openreach off entirely, but the regulator has resisted.
Ofcom said that BT has not gone far enough to address its concerns about BT's ability to favour its retail business when making investment decisions in Openreach. The regulator wants Openreach to become its own company with its branding, budget allocation, and board made up of non-executives and a chairperson not affilliated with BT.
BT said in a statement: "We put forward proposals in July that we believe are fair and sustainable, and that meet Ofcom's objectives without disproportionate costs.
"We are implementing these proposals, and have just appointed Mike McTighe to be the first chairman of Openreach. We are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach chief executive and the form of legal incorporation.
"We will continue to work with Ofcom to reach a voluntary settlement that is good for customers, shareholders, employees, pensioners and investment in the UK's digital future."
On Monday, BT announced that the inagural Openreach chairman would be Mike McTighe, who was on Ofcom's board between 2007 and 2015.
Announcing the appointment, BT chairman Sir Michael Rake said: "We promised in July to create an Openreach Board and we are delivering on that promise.
"I remain hopeful this significant move by BT can help to underpin a sustainable, proportionate and fair regulatory settlement that is in the interests of the whole country."
In spite of this move, there are still prevalent voices within the industry who think that splitting BT from Openreach will do little to actually solve the inherent issues in the UK's broadband infrastructure. Jaime Fink, co-founder at Mimosa Networks said: “Despite Ofcom’s proposal, the infrastructure problems facing the UK market that prevent the rollout of a nationwide next-generation broadband network still remain.
"The DSL (cable) foundations that underpin much of the UK’s broadband network simply do not offer the bandwidth and reliability to support today’s internet applications and meet the demands of tomorrow’s increasingly data rich services. The roll-out of fibre also continues to present challenges in rural and dense urban areas, where the cost and disruption of digging trenches has prevented the roll-out of fibre, leaving consumers and businesses with low-performance broadband solutions."