Toot'n,
There really isn't such a big difference between N and HO scale when it come to decoders. This Kato engine comes with a factory fitted light board and DC as standard. The TCS decoder is a simple drop in type, no wires just a matter of removing the light board and dropping the DCC decoder in place over the rails and soldering the motor tabs to the appropriate pads on the decoder. That's it, very very easy.
The rails that you see that are raised are a "normal" issue with the Kato engines, I would prefer to see a better method for their installation, perhaps plastic clips that they slid under to keep them solidly in place BUT allow them to be removed so they can be insulated when installing a decoder. Anyway, when the decoder is located and the Motor Tabs soldered to it, that holds th decoder down which, in turn, pushes the rails down and back into their proper place. That in turn places pressure on the ends of the rails, forcing them down and onto the tabs from the trucks. Yep, it all looks a bit sloppy as seen above, but when put together it becomes quite solid.
At this stage, because the motor is free and the wheels all turn on DC, I am leaning toward it being a decoder issue. If things still do not work when the new decoder is installed OR the new decoder fries itself when power is applied then there is obviously some other issue. If that happens, and I hope like hell it doesn't, then I think that will be the sign to say good bye to that particular engine.
Anyway, I do have an F3 A with DCC installed (double checked this time) on its way to me and yes, the F3 shells/bodies and F7 shells/bodies are interchangeable according to Kato. I bought my wife an F3 A with DCC installed so I have also compared the two engines side by side and they are identicle in length and width.