Openreach should sit as a distinct business as part of the BT Group, communications regulator Ofcom has ruled.
The decision comes as a surprise to many, who expected Ofcom to force Openreach, which runs the UK's broadband infrastructure, to split from BT completely.
But Ofcom boss Sharon White told the BBC that this method would give Openreach the independence craved by BT's competitors, without the time and financial costs of a complete sell-off.
Last week, a group of MPs called for BT to "put your house in order", accusing it of “significantly under investing" in Openreach. BT's competitors have said its lack of investment has resulted in below-par services for their customers.
Under the plans set out by Ofcom, Openreach will have its own board, branding and control over its budget.
A spokesperson for the Department of Culture, Media and Sport said "a more independent Openreach is needed to benefit consumers".
But the government has stressed that the option of enforcing a full split is still open if investment in Openreach continues to lag.
"We need more fast fibre right to the doorstep," Ofcom boss Sharon White said.
She said it was the "biggest shake-up to Openreach in its 10-year history" which will ensure the UK's broadband infrastructure works for the whole country, 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."