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Sir Kay is Arthur's stepbrother in the old stories as well as this one. He captures Hank and takes him back to Camelot to be executed… only to fall into line with the rest of Camelot when Hank unveils his magic.
Kay serves the same purpose as Sagramor and most of the other knights: that is, to point out how dippy and mean most of the "heroes" (that's in scare quotes because, you know, they're actually jerks) in Arthur's era really are. For starters, he's an outlandish liar and a pompous jerk, spinning a ridiculous story about how he caught Hank (and snarking on the man's wardrobe to boot):
Sir Kay told how he had encountered me in a far land of barbarians, who all wore the same ridiculous garb that I did—a garb that was a work of enchantment, and intended to make the wearer secure from hurt by human hands. (4.2).
That's business as usual at the Round Table, which makes Kay no different than the rest of the tin-can gang who hang out in Camelot.
There is one key way that Kay differs from his cohorts, though, and that's his bravery… or lack thereof. While Sagramor's an idiot, he at least shows some guts from time to time; Kay however, actually has Launcelot dress in his armor and fight his battles for him:
Sir Launcelot rose quietly, and dressed him in Sir Kay's armor and took Sir Kay's horse and gat him away into distant lands… (3.3)
Again, like the other Arthurian characters, Sir Kay's negative qualities strip away all those earlier notions of his heroics. He's a satirical figure: a joke of a knight rather than the legitimately brave role that he'd play in Malory's work. We don't see much of him after Hank goes free… probably because there are plenty of other idiot knights to tend to.