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When you hit around 7000 Samurai points you unlock the ability to use the character model of any NPC you've knocked out (use blunt attacks... feel free to kill them when their on the floor crying, it will still count towards a knock out AND a kill). You cannot change the individual parts of the character model (IE different heads on different bodies). But feel free to have Shuzen Vs Shuzen Mirror Match... or actually have Genjuro grow a pair and Lead the Ouka Clan into battle instead of running like the fat piggy he is.
You can still use any accessories you've obtained on NPC character models though, so you can still do quite a bit to customize your characters.
I used one of the Ouka Clan gang members with the open shirt (bare chest) and put the Hyottoko mask and both Senju-Kannon (Bishnu arms) under it to look like Quado from Total Recall... it was interesting... and slightly creepy. (inspired by Kevin Pereira's costume on G4TV's attack of the show)
Gamer Tag: Rukhan http://youtube.com/watch?v=6k6MzmsN594 = Overlord Vid of 100%, 0%, and all weapons and armor. *spoilers in vid*