The instance always validates coz it is made based on the schema :D… when u set the test instance that is when the real errors start coming. Have you set the trailer while creating the flat file??
Take a look at this link and excuse me if you have extensive experience with flat file wizard, but I had a similar problem with delimited files and a run thorugh this link http://www.codeproject.com/useritems/FFSchemaWizard.asp(it is for delimited files but the child element configuration will be pretty similar for positional files) helped me out..why dont you paste a sample file with field positions, ill take a look.
-Mahesh