The watchdog called for Openreach to become a "distinct" company that is "legally separate" from BT with its own board and its own brand.
BT's wholesale division supplies broadband infrastructure for ISPs including Sky and Plusnet, despite the fact BT itself offers a broadband service.
The changes should mean Openreach engineers will "turn up on time", that BT will invest in infrastructure and that rivals will have access to BT's high-speed fibre network, according to Ofcom chief executive Sharon White. The reformed Openreach will have to consult with its customers on major investments.
But Ofcom has resisted calls from rivals to split off Openreach completely, despite MPs warning that this would relegate millions to poor broadband service.
In January, MPs found 5.7 million people do not receive minimum speeds as determined by the watchdog, due to poor service from Openreach.
Ofcom is seeking views on its proposals by 4 October.