Yes and no. Yes, it is not a criminal offence and there is no law against it.
No, you may be able to get an injunction to stop him.
As a private individual a person can have cctv cameras in/on his premises pointing at whatever he chooses. The Data Protection Act does not apply to individuals. That individual will only attract the attention of the police if he causes a disturbance by his use of cctv (a breach of the peace). If that individual creates a nuisance (say by harassing his neighbours by compromising their privacy in their own home) they might seek a civil action against him for damages, or seek an injunction against him to cease the nuisance.
If your neighbour is at all approachable, ask him to afix a shield to the camera, so his view is restricted to his own property.