ftp on SME works (or always has for me), but still passes user login information in plain text.
The devs have been hoping to remove ftp from the base since 2006, or re-work how SME handles it:
Bug 717If you still want to use ftp:
Anyone listed in /etc/ftpusers will be denied ftp access. By default this includes 'root' and any groups you have created in server-manager (which also denies access to the members of those groups).
You can get a server-manager panel for configuring ftp users and chroot paths by installing
Remoteuseraccess (but search the forums and bugzilla for any recent reports of problems before you install).
As for why things aren't working, check your log files to see if you're getting any useful error message -
/var/log/messages
/var/log/ftp/*
/var/log/secure