Bug: bypassPermissions does not bypass all permission prompts in VSCode extension

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

With bypassPermissions: true and "permissions": {"allow": ["*"]} configured in .claude/settings.local.json, the VSCode extension still shows permission approval dialogs for tool calls (Bash, Edit, Write). The user must manually click "Allow" each time despite the configuration explicitly bypassing all permissions.

What Should Happen?

All tool calls should be auto-approved without showing any permission dialog, respecting the bypassPermissions and allow-all configuration.

Error Messages/Logs

Steps to Reproduce

1. Create .claude/settings.local.json with: {"permissions": {"allow": ["*"], "deny": []}}
2. Open a project in VSCode with Claude Code extension
3. Ask Claude to edit a file or run a bash command
4. Permission dialog appears despite allow-all config

Claude Model

Opus

Is this a regression?

I don't know

Last Working Version

_No response_

Claude Code Version

2.1.88

Platform

Other

Operating System

Windows

Terminal/Shell

VS Code integrated terminal

Additional Information

This is specifically about the VSCode extension, not the CLI. The CLI respects bypassPermissions correctly. The extension seems to have its own permission layer that overrides the settings.local.json configuration.