Thanks Falko again for the response. The auth log wasn't showing me anything, it was showing all the authentications as accepted. I actually managed to find this out today, If anyone is interested this is what I had to do.
Replace this line in the sshd_config file:
Subsystem sftp /usr/lib/openssh/sftp-server
With this line:
Subsystem sftp /usr/lib/sftp-server
that got rid of the subsystem error. And I got connected okay.
Thanks to one and all!